Should She Marry Him?Greta Hicks
May 27, 2014 — 3,758 views
A frequently asked question from female clients is, “My boyfriend has tax problems and he has asked me to marry him. Should I?” The standard answer is, “Tell him yes, but only after his tax problems are resolved.” Once married, his tax problem may become your tax problem.
No, this is not a personal advice column, but this a common, and serious, potential tax problem. First, remember that we are in a community property state. Second, the Internal Revenue Service (IRS) follows the income and property laws where the taxpayers are located.
Because of certain tax benefits married filing jointly (MFJ) allows, many married taxpayers choose to file a joint tax return. If MFJ is elected, “both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.”
Facts from a recent phone call: Jean is a teacher with two children and owns her home. All her income taxes have been currently filed and fully paid. Her boyfriend, Joe, owes back taxes. When he asked her to marry him, she said “Yes.” What are the possibilities regarding the taxes and what are potential solutions?
- Prenuptial agreement. Consult with an attorney to discuss the possibility of her income being her income and her house remaining her house. A prenuptial is not a cure-all, but it is better than no agreement.
- Suppose they file a joint tax return, and the IRS keeps their refund and applies it to his back taxes. What are her remedies? Rev. Rul. 2004-74 provides guidance under Internal Revenue Code (IRC) 6402 “regarding the amount of an overpayment from a joint tax return that the IRS may offset against a spouse’s separate tax liability for taxpayers domiciled in Texas.” Three different fact situations as discussed and the solution is determined by which spouse made tax payments and which spouse incurred liability. She can file a Form 8379, Injured Spouse Allocation. The IRS will use a formula discussed in Rev. Rul. 2004-74 to determine which part of the refund is hers and refund that amount to her. When filing a Form 8379 “with a joint tax return or amended joint tax return, enter ‘Injured Spouse’ (preferable in red) in the upper left corner of page 1 of the joint return.” IRS Tax Tip 2011-60, Revenue Ruling 74-611, Rev. Rul. 85-70, Publication 555 at www.irs.gov and the Financial Management Services, www.fms.treas.gov, provide additional information regarding application of income tax laws in a community property state. If Form 8379 is not timely processed, call the Treasury Offset Program Call Center at 800-304-3107.
- Maybe the remedy is to file a married filing separately (MFS) income tax return. Humm? First, the MFS tax bracket is higher, which results in more taxes than filing as MFJ. Also, in a community property state (without a prenuptial agreement), the income of both individuals is added together and divided in half. The good news is each will owe income taxes on one-half of their community income under the MFS rates. See Publication 555 for details of allocating community income. On a MFS tax return, one-half of his self-employment income is on her tax return, which results in her owing taxes on one-half of his income; however, one-half is better than being responsible for 100 percent of taxes owed on a MFJ tax return. The good news is that on a MFS return, she does not owe any self-employment taxes on the one-half of his self-employment income reported on her return.
- Suppose the IRS decides to levy her paycheck. IRM 22.214.171.124: “In community property states, taxpayers who are liable for delinquent tax have a community property interest in their spouse’s property and rights to property. In this case, the delinquent taxpayers’ property rights in their spouses’ property and rights to property might be subject to levy.” See references in 2 above and Internal Revenue Manual (IRM) references.
- Let’s say a federal tax lien is filed and it is attached to her house. What then? She can attempt to keep her house as separate property by not allowing him to make payments on the house or by not making payments on the house from community funds and/or joint bank accounts. She will need to prove funds have not been co-mingled and refute the underlying tax liability.
- After filing a MFJ income tax return, the couple decides to get a divorce. If they owe taxes on the joint income tax return, either one of them can file a Form 8857, Request for Innocent Spouse Relief. Form 8857 covers three types of relief: innocent spouse relief, relief by separation of liability and equitable relief. When requesting relief based on community property laws, Form 8857 must be “filed no later than six months before the expiration of the period of limitations on assessment (including extensions)” against the nonrequesting spouse or former spouse for the tax year for which the innocent spouse is requesting relief. For additional information on innocent spouse relief, see IRS News Release IR-2011-80 and Notice 2011-70.
Generally, community property laws require taxpayers to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to the innocent or nonrequesting spouse (or former spouse) for purposes of requesting any relief from liability.
Per Rev. Proc. 2003-19, the nonrequesting spouse has the right to appeal the preliminary determination to grant partial or full relief to the requesting spouse when the preliminary determination letter is issued April 1, 2003, or later. However, the nonrequesting spouse may not petition the Tax Court from the final determination letter. If relief is denied in part or in full, and the requesting spouse petitions the U.S. Tax Court, the nonrequesting spouse, by law, will be given the opportunity to become a party in that proceeding.
The answer remains, “Clear up the tax problems before marriage."