Marriage, Divorce & Tax Debt: What You Need to Know About Relief from the IRS

A person getting married or divorced in the United States should note the tax implications for doing so. Marriage and divorce are two clearly significant life events. Yet the tax consequences of both are not widely understood, especially when the couple’s joint tax liability is negatively impacted by the actions or debts of one spouse.

Innocent or Injures Spouse

Often one spouse wants to dispute tax debt owed due to the misconduct of the other spouse. This is when the “innocent spouse” or “injured spouse” arguments come into play. However, these two concepts are often confused with each other, when there are actually key differences.

Innocent Spouse

Innocent spouse relief is intended for situations where one spouse made errors or omissions on the couple’s joint tax return. The error or omission could be unreported income, or an incorrect deduction, credit or basis, by one of the spouses. The other spouse can ask to be relieved of responsibility for the financial consequences (tax, interest, penalties) for the erroneous or unreported items. The “innocent spouse” is claiming they did not know, or have reason to know, of the error or omission.
For example, one spouse may not know of the other’s unreported $15,000 in gambling winnings. Or perhaps the spouse did not actually pay $10,000 in home office expenses, despite taking the deduction on their joint return.
Most innocent spouse claims are denied by the IRS. The spouse making this claim has a fairly high bar to show they had no reason to know of the unreported or misreported item. And the IRS will compare the debt owed to what the spouse would have owed if they had filed as Married Filing Separate.

Injured Spouse

In tax parlance, an injured spouse is a person whose tax refund is used to cover the past-due debts of the other spouse. The debt owed will often be tax debt the other spouse incurred before marriage. But thanks to the Treasury Offset Program, the refund could be seized for many types of unpaid debts owed to federal agencies and states, including the following:

• Unpaid federal or state taxes
• Late alimony or child support payments
• Delinquent student loan debt or other debt owed to federal agencies

By requesting insured spouse relief, the spouse is seeking a refund of his or her allocation of the joint tax refund. The insured spouse must prove he or she has no responsibility for the other spouse’s debt.

Tax Implications of Divorce

Divorcing couples must consider any joint tax debt owed by the couple. The IRS generally has the power to collect the joint tax debt from either of the divorcing spouses. This is true no matter what the divorce decree states about responsibility for the tax debt. Accordingly, the divorce decree or settlement should clearly state: (1) which spouse is responsible for the joint tax debt and (2) the remedies available if one spouse ends up paying some or all of the debt.