Divorce can bring unwelcome surprises when spouses disclose their financial information and bring their own tax and financial professionals onto their divorce teams. Sometimes this involves issues with joint income tax returns.
If your spouse took care of filing the taxes, you may have paid little attention to them and just signed them. Nonetheless, you have “joint and several liability” for them. What if you learn that your spouse made serious errors or intentionally misreported information? Are you responsible for paying a share of the unpaid taxes along with interest and penalties?
It depends. The Internal Revenue Service (IRS) offers options for spouses and former spouses who filed a joint return with someone whose errors or cheating caused the underpayment of taxes.
Innocent spouse relief
This relieves a person from having to pay any additional taxes due because of a spouse’s failure to report income or improper credit or deduction claims. Not all applications for innocent spouse relief are granted. A person must convince the IRS that they were uninvolved in the tax filings and unaware of the misinformation reported. The IRS will consider things like your education level, your business acumen and whether the erroneous information applied to you. If your own income was underreported, you can’t claim to be an “innocent” spouse.
Separation of liability relief
If you don’t qualify for innocent spouse relief, you may qualify for separation of liability relief once you and your spouse are legally separated, divorced or have lived separately for at least a year. You’ll still likely have to pay some of the additional tax owed, but only the portion that is determined to be your responsibility.
There are other options available if you don’t qualify for either of these. It’s crucial to remember that there are time limits. For example, you must apply for these two types of relief within two years after the IRS first sent a notification of the tax owed.
Too often, people don’t learn about their spouse’s tax reporting errors until after they’re divorced when the IRS sends them a notification. Even if your spouse agreed to pay any tax debt in your divorce decree, that doesn’t matter to the IRS unless you’ve sought some form of relief from them. If you suspect that income tax issues may come back to haunt you, make sure you have sound legal and tax advice throughout your divorce.