When the topic of divorce comes up, conversations often focus on the emotional and financial implications. One question that frequently arises but isn’t always at the forefront of everyone’s mind is: What happens to IRS debt during and after a divorce?
Understanding tax obligations during these challenging times can be confusing, so we’re here to shed some light on the situation. Here’s a closer look at IRS debt and divorce, broken down into five critical points you should consider.
1. Joint Returns And Joint Responsibility
When a couple files their taxes jointly, both parties are equally responsible for any owed taxes, penalties, and interest. This holds true even if only one person earned all of the income or the debt was a result of one person’s actions.
Divorce doesn’t negate this joint responsibility. If, for example, your ex-spouse was running a business and incurred a significant tax debt, you could still be on the hook for that debt if you had filed taxes jointly during that time.
However, there are remedies available to those who believe they shouldn’t be liable for a tax debt incurred due to the actions of their spouse. For more details on potential solutions, see this post for more info on tax relief.
2. Indemnity Clauses In Divorce Agreements
While the IRS considers both parties responsible for the debt if they filed jointly, divorce agreements can stipulate which party is responsible for paying back the debt. If, for instance, your divorce agreement specifies that your ex-spouse is responsible for all tax debts, they would be legally obligated to cover these costs. However, if they don’t, the IRS can still come after you. In this case, you could then seek legal recourse against your ex-spouse for not adhering to the divorce agreement.
Photo by RDNE Stock project: https://www.pexels.com/photo/close-up-shot-of-a-person-writing-on-a-contract-7841499/
3. The Innocent Spouse Rule
There’s a provision called the “Innocent Spouse Relief” that may save you from having to pay taxes, interest, and penalties due to the actions of your ex-spouse. If you can prove that you had no knowledge or reason to know about the tax debt when signing the joint return, you might be absolved from paying it.
Keep in mind, though, that obtaining this relief is not easy. You’ll need to demonstrate that it would be unfair for you to pay the tax debt given your circumstances.
4. Separate Filings Don’t Always Mean Separate Debts
If you and your spouse chose to file taxes separately during your marriage, you’d typically be responsible only for your tax debts. However, there are exceptions.
For instance, if you live in a community property state (like California or Texas), both spouses might still be responsible for tax debts incurred during the marriage, even if they filed separately.
5. Consider The Impact On Future Financial Decisions
If you’ve divorced and have outstanding joint IRS debt, it can impact your future financial decisions. Whether it’s applying for a mortgage, taking out a personal loan, or even renting an apartment, your credit report may reflect this debt.
Plus, if you are anticipating a tax refund in the future, the IRS could seize that refund to cover the outstanding debt. It’s crucial to be proactive in addressing these issues, either by working out a payment plan with the IRS or consulting with a tax professional to explore your options.
Conclusion
Navigating the complexities of IRS debt during and after a divorce can be daunting. However, by understanding the implications of joint filings, being aware of your rights and potential relief options, and considering the long-term financial impacts, you can make more informed decisions.
If you’re going through a divorce and have concerns about existing or potential IRS debt, consider consulting with a tax professional. They can provide guidance tailored to your unique situation and ensure you’re taking the best steps to protect your financial future.
