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Can You Be Penalized for Your Ex-Spouse’s Tax Liability?

Posted by Brandon Keim | Jul 22, 2022 | 0 Comments

Arizona is a “community property” state. The law provides that spouses share ownership of “community property,” assets they've acquired during their marriage, but assets they brought to the marriage remain their own (i.e., “separate property”). And, if they divorce, they must divide this community property equally. The concept seems straightforward enough, but, in practice, it can become much more complicated. One reason for this is that community property doesn't just include assets. It also includes debts—including payments to the Internal Revenue Service (IRS).

Thus, community property laws can mean that spouses can end up sharing penalties for their spouses' tax liability. 

Married Filing Separately Status

Couples can avoid that with a “married filing separately return,” one of the five status options the IRS delineates. We advise spouses to file these returns—which reflect their respective separate property and can prevent any future confusion over who owes what in taxes.

Of course, that's about tax planning. It isn't much help to those who already filed joint returns that inflated their liability. 

The good news is that the IRS is aware of the issue. And there are some options to pursue if you're a spouse unfairly penalized for your former spouse's actions.

Consider the following scenarios:

At the time a couple married, one spouse was liable for an outstanding tax debt while the other was current on tax payments. When they later filed a joint return, some of the couple's tax payments went to resolve some of the spouse's past debt.

A couple received a tax refund, but they were entitled to the return because of deductions that related to one spouse's separate property—their small business.

One spouse took actions that resulted in tax liability, and these actions did not benefit the married couple. The second spouse would have received a higher return if the other hadn't acted to the couple's detriment.

As a starting point, the IRS credits spouses' tax payments equally. They both are considered to have paid half of the tax due, and they're entitled to half of an overpayment.

However, the mere fact that the couple filed a joint tax return does not automatically turn separate property into community property. A filing, on its own, does not create ownership in the other spouse's separate property.

Asset ownership and debt liability remain dictated by the relevant state's laws. Therefore, the IRS will look at the nature of the spouses' debts to determine what is separate and community property.

To determine the amount of the overpayment that can be used to offset one spouse's separate tax liability, the IRS uses a two-step process to calculate what each owes. The IRS divides each's separate tax liability by their total liability, and then it multiples that amount by the couple's joint liability.  

Wages are community property, so overpayments relating to either spouse's wages will be considered community property.

But under Arizona law, a creditor (meaning the IRS) cannot use any of the non-liable spouse's separate property to satisfy the other spouse's tax debt.

For assessing the amount of overpayment relating to separate property, the IRS will divide the tax payment related to the separate property by the total tax payments. Then, it will multiply that result by the overpayment.

Once again, the concept is easier to understand than apply. To execute the calculation, the IRS uses a five-step analysis.

And, no matter what the formula, the IRS considers these cases as highly fact-specific and dependent on state law. 

Why an Experienced Tax Attorney is so Important

Resolving tax liability for ex-spouses is complex but important. You want to make sure you receive any overpayment you're owed. You also want to make sure you aren't saddled with any continued liability for your ex-spouse's taxes. That's why this isn't something you should just try to figure out on your own.

Instead, consult an attorney specializing in tax law—someone whose practice is dedicated to understanding the legal issues and understands firsthand how the IRS will address them. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.

About the Author

Brandon Keim

A Certified Tax Law Specialist, CPA, partner at Frazer Ryan Goldberg & Arnold LLP, and former Senior IRS Trial Attorney, Brandon Keim holds an LL.M. in Taxation from Georgetown University Law Center.

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The act of visiting or communicating with Brandon A. Keim via this website or by email does not constitute an attorney-client relationship. Communications from non-clients via this website are not subject to client confidentiality or attorney-client privilege. Further, the articles, discussion, commentary, forms and sample documentation contained in this website are offered as general guidance only and are not to be relied upon as specific legal advice. For legal advice on a specific matter, please consult with an attorney who is knowledgeable and experienced in that area. Attorneys listed in this website practice only in the jurisdictions in which they are admitted. This website is governed by the Arizona Rules of Professional Conduct.

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