If the IRS determines that as between spouses only one is liable for a tax debt, should that finding be binding on a divorce court determination as to whether the marital tax debt should be allocated to only one spouse?
Married couples who choose to file a joint tax return are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise from the joint return, even if they later divorce. Joint and several liability means that each taxpayer is legally responsible for the entire liability. Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits. This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.
In some cases, however, a spouse can get relief from being jointly and severally liable. Such “Innocent Spouse Relief” relieves a spouse from additional tax owed if based upon the other spouse’s failure to report income, improper reporting of income, or the claiming of improper deductions or credits.
In order to qualify for Innocent Spouse Relief:
- The understatement of tax (deficiency) must be solely attributable to the other spouse’s erroneous item (omitted income, or incorrectly reported deductions, credits, or property basis);
- The innocent spouse must establish that at the time the joint return was signed the spouse didn’t know, and had no reason to know, that there was an understatement of tax; and
- taking into account all the facts and circumstances, it would be unfair to hold the innocent spouse liable for the understatement of tax.
Justice Catherine M. DiDomenico, in her August 29, 2017 Richmond County (Staten Island) Supreme Court opinion in S.M. v. M.R. (the subject of last week’s blog post on the effect of an attorney retainer agreement cap), appeared to hold that a Tax Court innocent spouse finding should, conclusively, result in the equitable distribution of the entire tax debt to the other spouse.