September 01, 1997
Taxes and Marital Situations
A persons marital status may affect both the calculation of income tax owed
and Internal Revenue Service actions to collect any unpaid taxes. Two concepts that may
affect people in special circumstances are "joint liability" and "community
property." In 1996, the IRS began a study on how these concepts affect taxpayers,
especially those who are divorced or separated, and invited public comment on proposals
addressing specific issues. The resulting report is under final review at the Treasury
Joint and Several Liability
The tax law allows a married couple to file a joint income tax return, even though one
spouse may not have any income or deductions. The law also makes each spouse on a joint
return fully liable for any taxes owed. Even if they later separate and/or divorce, they
each remain liable for any taxes, interest or penalties arising from the joint returns
they filed while married. This liability remains regardless of any divorce decree or
For example, if a couple divorced and the IRS assessed more tax after auditing a joint
return the couple had previously filed, each person would be held liable for the unpaid
tax and related interest. The IRS could enforce collection against either spouses
assets, even if that person had subsequently remarried. Under the tax law, not even a
written agreement in which one person took responsibility for any taxes owed would relieve
the other spouse of the obligation to pay.
Since the IRS can collect unpaid taxes from either person on a joint return, one spouse
might pay taxes without knowing what, if any, collection activity was under way against
the other person. The IRS established uniform procedures in 1996 to notify one spouse of
activity against the other while safeguarding the privacy rights of both. The Taxpayer
Bill of Rights II later made this a requirement of law.
Innocent Spouse Relief
There could be times when it would be unfair to collect from one spouse taxes that
resulted solely from the other spouses actions. Recognizing this, Congress in 1971
set four conditions for relieving one spouse of liability for a joint return. All of the
conditions must be met for this "innocent spouse" relief to apply.
These conditions are:
- the spouses filed a joint return;
- this return substantially understated the tax because of a grossly erroneous item of one
- the other spouse did not know, and had no reason to know, of this understatement; and
- taking all the facts and circumstances into account, it would be unfair to hold the
other spouse liable for the additional tax.
The law further specifies the amounts by which the understatement of tax must exceed
the persons income. Many people seeking innocent spouse relief have been unable to
satisfy all the elements required under the law. For example, a person may meet all the
other conditions, but the tax understatement falls below the necessary level. Or a wife
may not be able to demonstrate that she had no reason to know that her husband
substantially understated the tax when he prepared the return. In some situations, the IRS
may determine different tax liability amounts for the husband and for the wife, even after
a joint return has been filed.
Community Property Laws
Ten states -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington and Wisconsin -- have community property laws, which may present special tax
considerations for some people. Community property laws generally consider each spouse to
own one-half of their community income.
A couples community property is everything they acquire during their marriage
while they are domiciled in a community property state. There are certain exceptions for
gifts or inheritances received, as well as for property bought with separate funds.
According to state law, each spouse owns half the community property. For example, each
spouse owns half of the wages earned by the other. Any property which cannot be identified
as separate property is considered community property.
The classification of property under state laws determines its status for federal tax
purposes. Thus, even if a married couple in a community property state file separate tax
returns, they must each report half of the total community income, including half of each
others wages. The law provides certain exceptions for those who live apart for the
whole year and do not transfer any earned income between them. Special rules also apply to
those filing separately who did not know of an item of community income, if it would be
unfair to include the income on that persons return.
Community property laws may also affect the treatment of assets which the IRS may
collect to satisfy an unpaid tax liability. All or a portion of the community property may
be used to satisfy a separate tax obligation of one spouse, even if the tax arose before
they were married. For example, suppose a woman divorces, remarries, and now lives in a
community property state, and there are unpaid taxes from the last joint return she filed
with her first husband. The IRS may levy her wages and the wages of her second husband,
since -- under community property laws -- she owns half of his income.
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