IRS - Before Individuals MarryMs. Greta P. Hicks
June 24, 2013 — 1,824 views
June is the most popular wedding month, followed by August, July and May. Long before the wedding, and preferably before announcing the engagement, the couple needs to ask each other some tough questions about money and taxes.
Question One. Do you owe the IRS money? If the answer is “Yes,” wait to get married until the IRS debt is fully paid. A new spouse (injured spouse) may be at risk of paying off the debt of not only his/her new love, but that of the joint tax return filed by the new love and his/her former spouse.
Example 1: Angel marries Theo. Theo owes the IRS money. They file a joint income tax return and their tax refund is retained by the IRS and applied to Theo’s old tax debt. Note: If any of the refund is due to taxes withheld on Angel, Angel can file an Injured Spouse Claim and the IRS will not retain her portion of the refund.
Example 2: After marriage, Theo discovers that Angel and her former husband, Lucifer, owe back taxes on a return they filed jointly. Because Texas is a community property state, one-half of Theo’s income is subject to being levied to pay off Angel and Lucifer’s old tax debt.
Example 3: Angel and Theo decide to settle Angel’s old IRS debt by filing an offer in compromise. One-half of Theo’s income plus Angel’s income is used to calculate the amount of money that the IRS will accept to settle the debt. If the assets have been commingled, the value of the assets will be included in the offer calculations.
Example 4: Angel and Theo request an “Account Transcript” from the IRS for their individual income tax returns for the past seven years, which will reflect taxes assessed, payments made and any outstanding balances.
Question Two: Have you filed all your tax returns? If yes, was any money owed. If no, why not? If no, do you expect to owe money?
Example 5: Theo and Angel request their respective Account Transcripts which will reflect years where returns have been filed and years where returns are due. Don’t marry until all tax returns are filed for all the reasons as explained in Question One.
Question Three: Do you have good credit? Engaged couples should exchange credit reports. It will reflect not only credit card and bank history, but also any Federal Tax Liens filed by the IRS.
Example 6: Theo discovers that Angel owes $30,000 in credit card debt, and Angel discovers that Theo owes the IRS money on his 2007 income tax return.
Question Four: Has anyone filed a lien against you? Liens are typically filed at the County Courthouse where a person resides or has lived. Liens may or may not be on the credit reports.
Example 7: Angel and Theo agree to take a trip to their respective County Courthouses and search for any liens filed. These liens may or may not be on their credit reports. Angel discovers there’s a Mechanics Lien on Theo’s residence.
Question Five: After we get married, are we going to file a joint tax return? By signing a federal joint income tax return, both parties are agreeing to pay 100 percent of any taxes owed if the other party doesn’t have money or skips out of the country.
Example 8: Lucifer and Angel file a joint income tax return for 2009. Lucifer is self-employed and hasn’t made estimated tax payments. Angel is a teacher and sufficient federal taxes are withheld. They separate and Lucifer sails off to Martinique. The IRS contacts Angel for full payment of taxes owed. Example 9: Same facts as Example 8 except Angel and Lucifer get a divorce and the divorce decree states that Lucifer will pay any federal taxes due for the 2009 tax year. Lucifer doesn’t pay the taxes, which leaves Angel at the mercy of the IRS. The divorce decree is a contract between individual parties. The signed joint return is a contract between Angel, Lucifer and the IRS. When collecting taxes due, the IRS doesn’t honor the conditions set out in the divorce decree.
Question 6: But Texas is a community property state. I thought I was responsible for only one-half of everything. Why do I have to pay all the taxes owed? When it comes to owing the IRS money, living in a community property state can be a negative versus a positive. See Examples 2 and 3.
Question 7: If I get a divorce, will I still have to pay the back taxes? Maybe yes. Maybe no. See Examples 1, 2, 3, 8, and 9. Example 10: Angel divorces Lucifer and they owe taxes on a joint tax return. Angel marries Theo which puts one-half of Theo’s income at risk of being levied by the IRS. Later, Theo and Angel divorce. Theo’s current income is no longer at risk for the tax debt of Angel and Lucifer.
Solutions to Owing the IRS Money
The best solution is prevention. Find out before the marriage if there’s outstanding debt. The IRS has installment payment programs, but there are fees, and interest and penalties still accrue. For Example 2, the injured party can file a Form 8379 Injured Spouse Claim, and his/her portion of refund will not be applied to the “guilty” party’s old tax debt. For Example 4, Offer in Compromise is often a solution for owing the IRS money. File a Form 656 with the IRS and wait to see if they will settle for less money. If you’re single when the Form 656 is filed, then your income, expenses and assets are entered on the form. If you’re married, IRS rules follow community property rules. The offer process is complicated.
Disclaimer: Use these examples as a guideline only. Texas community property law, joint tax return filing rules and IRS collection procedures are complex, and research is recommended.
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.