Jeff Landers, CDFA
I write for women going through financially complex divorces.
It’s that time of year again: Americans everywhere are gathering their tax documents, visiting their accountants, filling out the proper forms, and submitting their income tax returns to the Internal Revenue Service. The process isn’t necessarily “easy.” Every year, the tax code seems to get increasingly nuanced and complicated, and if you’re a divorcing woman, you could be facing additional unique challenges, as well.
The potential tax trouble for you as a divorcing woman primarily lies in filing a joint return with your husband. It’s could be dangerous financially, because if it should come to light later that taxes have been underpaid, it won’t matter to the IRS which of you was responsible. If the return was filed jointly, the government can go after you both… even if you didn’t personally earn one dime of the reported income! What’s more, you will still be liable for errors and omissions in joint tax returns even after your divorce.
Some women insist that their divorce settlement agreements should include a provision that if there are tax issues to be rectified down the road, their ex-husbands are responsible. On the surface, that sounds reasonable, and you can certainly hope that your husband would abide by such a provision. Understand, however, that the IRS is not bound by your divorce settlement agreement, no matter what it says about who is responsible for taxes. As far as the government is concerned, if you’ve signed the tax return, you own the consequences… and if taxes are owed, you can be sure they will come after you, as well as your ex, for payment.
This can be a tremendous burden if your husband has underreported income, hidden assets, and/or claimed improper deductions or tax credits, or engaged in other dishonest shenanigans. Taxes, interest, and penalties can quickly add up to staggering amounts, and you could find yourself owing the federal (and your state) government many thousands of dollars through no fault of your own.
How can you protect yourself against being pursued for tax debt that isn’t fairly yours?
Well, first of all, if you have even an inkling that your husband is not approaching his taxes with total honesty and integrity, you should think about filing a separate tax return. Under the provisions for “Married Filing Separate” (MFS) status, you would be responsible only for taxes on income subject to reporting on your individual return. Using MFS status might mean that in total, you and your husband will pay more in taxes than if you’d filed jointly, but believe me, it will be worth it not to be considered responsible for a fraudulent return.
If it’s too late to file separately, all is not lost. The IRS recognizes that there are innocent spouses who sign joint income tax returns unaware that anything was amiss, and further recognizes that these innocent spouses need to be protected. In fact, you can formally apply for Innocent Spouse Relief, which may absolve you of responsibility for paying tax, interest, and penalties if your husband is found to have made false statements on your joint return.
Obtaining innocent spouse status isn’t a walk in the park, however, and it doesn’t happen in an instant. You will have to prove that at the time you signed the joint tax return, you didn’t know, and further, that you had no reason to know, that there was an understatement of tax. That can be difficult to establish in all but the most black-and-white circumstances. Indeed, you might need a forensic accountant to help make your case.
To decide whether you qualify for relief, the IRS will consider your financial situation, your education and business experience, and even whether or not you asked any questions about items on the return when you signed it. They may determine that you qualify for partial relief, i.e. that you might have known about some of the understated income, but had no reason to know about another portion.
My advice is to be proactive, and not to leave it to the IRS to determine how much you know about your marital income and tax situation. As with so many financial matters, it is always better to be knowledgeable early on. The more you know about your husband’s business, the less likely you are to sign a joint tax return you can’t stand behind.
For more information, as well as forms and requirements for applications for Innocent Spouse Relief, visit the IRS’s web page on Tax Information for Innocent Spouses.
Jeff Landers is the author of the Amazon best-selling books, Divorce: Think Financially, Not Emotionally – What Women Need To Know About Securing Their Financial Future Before, During, And After Divorce, Volumes I & II, and the forthcoming book, Think Financially, Not Emotionally® – A Woman’s Guide To Financial Security After Divorce (to be published late 2015).
All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
For further information, please go to our website at: http://www.BedrockDivorce.com or email Jeff at Landers@BedrockDivorce.com.