Avoiding Tax Liability in Divorce
One of the potential landmines in your client’s divorce may be their joint tax return with their soon to be ex–spouse. Your client may claim that the spouse should be responsible for the taxes due. According to IRC Sec 6013(d)(3), if a joint tax return is filed by or on behalf of spouses, they are jointly and severally liable for the full amount. There are three exceptions that could release one spouse from liability. They are (1) if a spouse signed the return while under duress, (2) Innocent Spouse, and (3) Injured Spouse.
If one spouse signed while under duress, then there is no joint tax return and no joint tax liability. The return is adjusted to reflect only the spouse who voluntarily signed the return. It is not easy to prove that a spouse was under duress when signing. Especially since most returns are electronically filed. If there has been a history of mental and or physical abuse, then a spouse may be successful claiming duress.
One spouse may be released of tax liability if they can demonstrate that they are an Innocent Spouse. Innocent spouse relief may be granted when there is an understatement of tax which is attributable to the other spouse, and the requesting spouse did not know or have reason to know of the understatement.
Injured Spouse occurs when someone has their tax refund withheld to cover the tax obligations of their current or former spouse. This sometimes happens after a couple is officially divorced. An individual files as Single, expecting a refund, only to have it applied to the tax obligation of their ex–spouse.
The time limit for obtaining relief using these exceptions is generally short, so your client should take action as soon as possible.