Divorces can be messy and complicated. The more your lives are tied together, the harder it is to separate them. One of the things many overlook when going through or having just finalized their divorce is taxes—more specifically, back taxes. Back taxes after divorce are not high on the list of priorities during or after proceedings. However, back taxes still need to be paid, and it’s best to know exactly who is responsible.
Keep reading to discover everything you need to know about tax debt and who is responsible for paying in the event of a divorce.
Why Would Back Taxes Be Due?
There are many reasons for incurring tax debt. Very few of them involve actual criminal intent to defraud the government. Most are simple mistakes or oversights on the part of the filer.
The most common mistake is incorrectly filling out your W-4 with your employer. It might seem like a nice surprise to see a larger paycheck than originally estimated. However, having a larger paycheck now could mean owing the IRS at the end of the year.
Along with an improper W-4, unclaimed income can lead to a hefty tax bill. The IRS considers any income taxable with only a few exceptions. While the IRS considers income like birthday money taxable income, problems typically arise with the sale of stock or land.
If you sell stock, land, or even your car, the money you made off of the sale is classified as taxable income. Failing to claim this income can lead to sizeable tax debt that you might not be aware of until it’s too late.
Paying Back Taxes After Divorce
If you owe back taxes, the IRS will send notices in the mail to you and your ex- or soon-to-be-ex-spouse. Failure to reply to these notices could result in severe consequences, such as wage garnishment.
It is best to avoid penalties like that and contact the IRS right away. There are a few factors that will help determine who is responsible for the tax debt.
- The time the debt was incurred
- Your filing status in the year of incurred debt
- Whether you knew about the debt at the time
Innocent Spouse Relief
Filing for innocent spouse relief can occur before, during, or after filing for divorce proceedings. Innocent Spouse Relief is for those who can prove they had no knowledge of the tax debt.
In this scenario, your spouse either failed to report income or claimed improper deductions on your tax returns. If you can prove there was no way you could have known about the failed reporting, you might qualify for this relief status.
This is easiest to prove if you and your spouse were either legally separated at the time of filing or had not been living together for at least one year.
Separation of Liability Relief
This form of relief divides the tax debt evenly between you and your former spouse. Qualification for this form of relief is similar to qualification for Innocent Spouse Relief. In order to qualify, you cannot have first-hand knowledge of the debt, and you must be either divorced, legally separated, or have not lived together for at least one year.
If you don’t qualify for either Innocent Spouse Relief or Separation of Liability Relief you may apply for Equitable Relief. Equitable Relief is reserved for instances when something was reported incorrectly on your joint return but is attributable to your spouse. You can also apply for Equitable Relief if the amount of tax was correct but the tax wasn’t paid with the return.
When requesting Equitable Relief, you must apply within the timeframe the IRS can collect the tax from you. If you have already paid the tax, you may request a refund. Requests for refunds must be applied for within three years of filing or two years after paying the tax, whichever is later.
The IRS and Divorce Decrees
When filing for divorce, you may include in the decree a clause about paying back taxes and who is responsible. Even if both parties agree and the judge signs the decree, the IRS has no obligation to honor it.
What does this mean exactly? It means that you may take your spouse to court for failing to pay back taxes after divorce, but this will not prevent the IRS from collecting tax debt from you.
When deciding who will pay back taxes and how much, the courts take into consideration fairness for all parties. However, they will also consider all local and federal regulations to ensure the divorce decree complies with the demands of the IRS.
Failing to Pay Back Taxes
The IRS sends several notices in the mail prior to taking action to collect on the tax debt. Failing to respond to IRS notices can result in the IRS taking action against you. This is often in the form of wage garnishment.
The IRS will notify your employer of the back taxes and require your employer to send a portion of your wages to the IRS. Wages, in this case, are any form of taxable income.
The IRS will usually garnish retirement income, employment wages, retirement pensions, and any tax refunds you may earn in the years following the year that debt was incurred. If the IRS can tax it, then the IRS can garnish it.
Overcoming Tax Debt
The IRS has no obligation to honor a divorce decree. This means any back taxes after divorce can be collected from either party by the IRS. However, tax relief options are available for those who wish to avoid paying back taxes your spouse is responsible for. That being said, not every situation is covered by the available relief options.
Fiscal Solutions Group has a team of experts standing by to assist with your tax debt and debt forgiveness, and we are capable of offering compromises and other financial solutions for back taxes. Fill out our online form today to let us know about your financial needs!