37

I have a friend who's in a unique situation. She has not worked since she and her husband were married 7 years ago. He has typically worked contract jobs receiving 1099's at the end of the year. She filed her taxes up to the point when they were married, but her husband said he would take care of it once they were married, she trusted him. She recently found out that he has failed to file taxes for close to 8 years, as she received a letter from the IRS to collect taxes for tax year 2011 (they were married in 2012)

They are currently in the process of divorce, the house is solely in her name and she is planning to sell the house.

Can she be held responsible for his back taxes? Can they place a lien on a house in her name for his back taxes? Should she file 1040's for the past years showing 0 income and Married Filing Separately status?

  • 10
    This is a unique situation. Do you know how the husband filed his taxes? IE did he file jointly, or individually with the intention of two separate filings? – NegativeFriction Dec 17 '19 at 13:16
  • 2
    @NegativeFriction Unfortunately, it's less unique than you might think... – corsiKa Dec 18 '19 at 3:50
  • 4
    You say "She filed her taxes up to the point when they were married [2012]..." Then the IRS 2011 demand is about his unfiled 2011 obligation, not hers? Innocent Spouse Relief is not the issue for 2011: it's not going to get her off the hook for the IRS placing a lien on their shared asset for his unpaid 2011 taxes. Beware that the house will be hard to sell with a tax lien on it, the Marital Separation Agreement should define who owes who what, who receves what from the sale, who pays what taxes, and the MSA should be written knowing that financailly irresponsible people often bankrupt out – smci Dec 18 '19 at 6:33
  • 5
    It's hard to believe her story - I don't find it hard to believe at all. I know many couples where one person has handled the taxes completely on their own for years or decades, and the spouse is literally 100% in the dark, without even a basic understanding of how income tax works or what a tax return looks like. – dwizum Dec 20 '19 at 16:51
  • 2
    This also begs the question "If she hires a hitman to take out the husband, is that amount tax-deductible?" – Omegacron Dec 27 '19 at 18:46
74

The IRS has a concept of Innocent Spouse Relief which is intended to handle situations like this. They describe it thoroughly on their website.

A married couple technically both have responsibility for paying taxes if they file together. However, if one spouse has no income, and was "innocently" unaware that the other spouse (who did have individual or small business income) was incorrectly filing their joint taxes, the innocent spouse can seek relief. This means that the IRS will no longer pursue that spouse for taxes, penalties, etc. and will only pursue the spouse who had the income (and incorrectly filed their taxes).

The rule applies to current and former spouses, so in the case where your friend is becoming divorced, it would still apply.

The best course of action for your friend is probably to seek advice from a tax professional on how to file for relief, if she is unable to understand or complete the process herself. And, of course, there needs to be a check against the facts of whether or not she actually qualifies, as we can't make that judgement with any sincerity based solely on your question here.

| improve this answer | |
  • 14
    The 'and' in the IRS's statement may even be too strong: I even know of situations where both were earning income, but one spouse told the other that taxes were being filed but weren't -- when the lying spouse died, the other pled their innocence to the IRS. And with the help of a tax attorney, did gain some relief on the imminent property seizure. The best advice above is to get a tax attorney. Navigating this without an expert is nigh impossible -- one will need a professional. However, as per my anecdote above, it can be done. – R. Hamilton Dec 17 '19 at 16:40
  • 10
    The couple were not married during 2011 and so the innocent spouse doctrine might not be applicable to the non-flied 2011 return. – Dilip Sarwate Dec 17 '19 at 22:09
  • 2
    A divorce that requires dividing a house when there are complex tax issues is a complex divorce. She should have an attorney handling the divorce who can help resolve the tax issues as well. The tax issues can be resolved by an enrolled agent or possibly a CPA, but they probably won't have the expertise to protect her interest in the house properly in the divorce. – David Schwartz Dec 18 '19 at 18:38
  • Innocent Spouse Relief only applies when a joint return was filed, according to the link in the answer. However there are other types of relief described in publication 971 that may be applicable. As I understand it, unless they live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), she may not need any relief at all, because without having filed a joint return, she is not responsible for tax on her husband's income. (Obviously, professional advice is necessary.) – prl Dec 19 '19 at 3:01
16

If the IRS is asking about the non-filed 2011 return which covered a time period before the couple married, then the woman would have needed to file her own tax return for 2011. Yes, the 2011 return would have been due by April 2012 by which time the couple might have been married already, but the woman's tax return should have been filed as a single person. Yes, the husband might have said that he would take care of it, but he couldn't have done so all by himself: the woman would have had to sign the 2011 tax return that the husband presented to her to sign ("Here, honey, I have filled out your Form 1040 for you and you just need to sign here"): his signature would not suffice. In any case, failure to file a tax return for 2011 cannot be laid at the door of the then newly-wed (and now soon-to-be ex-) husband, and the innocent spouse rules that @dwizum explained at length don't seem to be applicable to the 2011 return; the couple were not married at the end of 2011, and that's the status that matters for the 2011 return. If the woman was due a refund on her 2011 return, that money is gone forever. But it is more likely that not enough was withheld and so she owes some back taxes for 2011 plus interest and penalties.

For years 2012-2018 when the couple was married and the woman was not working, she might well have had very little personal income -- maybe some bank interest, stock dividends, etc -- and if so, might well not have needed to file a tax return at all based on her own income. If her husband did not file an income tax return at all, neither MFJ nor MFS, she has no tax liability for 2012-2019. Her husband is liable for not filing any kind of tax return and also for the unpaid taxes on his 1099 income etc, but not her. But if he filed fraudulent MFJ returns (which she would have had to sign) -- "Here, honey, this is our joint tax return for 2012 which I have prepared; just sign below my signature" -- then she might get some relief from the "innocent spouse" doctrine.

| improve this answer | |
  • 2
    With electronic filing a signature would just be little more than clicking a checkbox; and there'd be no technical impediment to the ex completing tax forms in his wife's name. No idea if IRS regulations actually take into account that faking an electronic signature is much easier than forging one on paper. – Dan Is Fiddling By Firelight Dec 18 '19 at 6:17
  • @DanNeely Yup. Electronic signatures are useless for detecting forgery. – Loren Pechtel Dec 20 '19 at 4:46
1

Since they weren't married in 2011, the IRS 2011 demand is about his unfiled 2011 obligation for his 2011 income, not hers. (But now his behavior may be endangering the main asset (house), even though you say it's in her name).

Innocent Spouse Relief may not be applicable for his (premarital) unpaid 2011 liability, and is tactically not the issue: it may not get her off the hook for the IRS placing a lien on the house for his unpaid 2011 taxes. This is not so much an issue of who the IRS believes is responsible for his unpaid 2011 tax liability, but a tactical issue about (possibly) preventing a tax lien being placed on the house (unlikely, assuming he has no other major assets), and (more likely) how to sell it with a tax lien on it and define in the Marital Separation Agreement who owes who what, who owes IRS back taxes for 2011, how much of them receives from the sale (knowing the IRS will likely place a lien on it for his 2011 liability, and the proceeds could be stuck in an escrow account for a while), who pays which taxes.

The MSA should be written knowing that financially irresponsible people often bankrupt or threaten to tactically bankrupt out of this sort of situation, to leverage concessions, and a paper promise from him to pay isn't worth much. Obviously she should try to decouple herself from him financially as fast as possible in every way possible: credit cards, bank accounts, loans, mortgages, CC balances, equity lines, insurance policies, car title, any other assets etc. Also, obviously it's in her interest to push for a status-only ruling converting her to Single by end of 2019 (for FY 2019 filing); this can be done without resolving the division of assets and debts. Run her credit report regularly, close down any shared financial doings, separate her finances.

Obviously, she needs her own separate lawyer advising on drafting a well-worded MSA, with an eye to preventing him bankrupting out or further damaging her credit until they're disentangled. A family lawyer who knows about bankruptcy and personal finances could be useful. But she also needs to move quickly and take action to take control of her finances; this will need more than a slow and lengthy exchange of legal correspondence. It's in his interest to drag things out.

(Presumably she is already trying to invoke Innocent Spouse Relief for their 2012-2018 taxes. But again, this may well not prevent the IRS placing a lien on the house).

| improve this answer | |
  • I'd like it better if you went into detail about OPs prospects for 2012-. Going through backflips to achieve a victory on 2011 taxes is moot if they will inevitably get clobbered in 2012-. – Harper - Reinstate Monica Dec 18 '19 at 23:47
  • @Harper-ReinstateMonica: I can't comment because it's a very weird situation and I'm not a tax professional or lawyer. Clearly he will get clobbered for 2012-18. The question is whether the house will get a lien on it. Also the more I think about it, it's frankly hard to believe her story: "She recently found out that they have failed to file taxes for close to 8 years". Not "him". They both had the joint obligation, on their joint income (assuming they filed MFJ not MFS). So we're supposed to believe in eight(!) years she never checked once. Assuming he blames her. He-said-she-said. – smci Dec 19 '19 at 3:16
  • I've been involved in nonprofits that lapsed for 3 years without filing their Form 990s... twice. I've heard of nonprofits that spent their whole endowments and restricted funds. So nothing surprises me, honestly. – Harper - Reinstate Monica Dec 19 '19 at 3:18
  • 1
    It's comparable because it means 9 people on a Board all sucking at taxes at the same time, so 2 is hardly surprising. I find her story plausible. Most people suck at/dread taxes, so would cheerfully take anyone up on "I'll do them for you". I don't know if you've owned property, but property tax is actively billed, unlike IRS/state income tax, so it's harder to miss. You do NOT pay your property tax on your state 1040, they are unrelated... In fact those nonprofits did manage to pay their property tax... – Harper - Reinstate Monica Dec 19 '19 at 3:30
  • 1
    Claiming the income tax deduction for property tax is optional. You don't ever need to claim it, so paying property tax doesn't oblige you to do anything with income tax. I agree OP has a joint liability to pay tax if the understanding was they would pay as married filing together. I don't believe IRS can rob them of that choice if they never made it. – Harper - Reinstate Monica Dec 19 '19 at 3:53

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.