Marriage and taxes are inexorably intertwined. Let’s begin with the basics of tax returns and tax liability. Most individuals (those with sufficient taxable income) have a tax filing obligation.
This is an individual obligation - even for married taxpayers. The default filing status for a married individual is Married Filing Separately. Married taxpayers are allowed to elect to file with their spouse - as Married Filing Jointly. Married taxpayers are not required to participate in the filing of a joint tax return.
For this discussion I’m assuming that the taxpayers do not live in a “community property” state.
For taxpayers not electing to be included in a joint tax return the liability for any unpaid tax is the personal obligation of the taxpayer - regardless of marital status. For taxpayers electing to participate in the filing of a joint tax return the obligation for unpaid tax is “joint and several”. This means collection of the entire tax can be attempted from each spouse - up to the entire amount of unpaid tax.
Let’s discuss a couple of examples - using Larry and Martha.
In the first example Larry is an employee and Martha is self-employed. They married in 2021. For 2020 each of them filed tax returns as Single. Larry had an overpayment of tax reflected on his tax return while Martha had a balance due. Martha did not pay the balance due that was reflected on her tax return. Does their marriage or their filing status for 2021 (i.e. Married Filing Separately or Married Filing Joint) have any impact on the liability for Martha’s tax debt? No - this is her personal debt - the IRS can only pursue collection from Martha regardless of her current marital status or her tax filing status for years other than 2020.
Let’s assume their personal tax situation is the same for 2021 - Larry has overpaid his tax and Martha has not made any payments towards her tax debt. If they choose the “default” filing status each will file as Married Filing Separately. Larry will receive his refund and for Martha the IRS will now attempt to collect taxes for both 2020 and 2021. Larry’s income and personally owned assets are not at risk with respect to Marthas tax debts - 2020 and 2021.
Now let’s assume they choose to elect to file as Married Filing Joint in 2021. Their income and deductions will be combined and there will be a tax amount determined. Larry’s wage withholding will be used to offset this tax liability. Assuming the withholding is less than the tax there will be no refund. There now exists joint and several liability for the unpaid tax - even though on a separate basis Larry has paid in enough to cover his portion of the liability. This means the IRS will attempt to collect 100% of the tax from both Larry and Martha. Once the tax debt has been satisfied the IRS will cease collection activities - regardless of the source of the funds. In other words the IRS will not attempt to collect 50% of the debt from each taxpayer. They will pursue collection of 100% of the debt from each spouse until the debt is paid.
Let’s assume that at the end of 2022 they are divorced. In the divorce agreement Martha agreed to assume all of the tax debt. How does this agreement affect collection activities by the IRS? The agreement has no effect on IRS collection activities. The IRS was not a party to the divorce agreement. The obligation for the unpaid 2021 taxes is still joint and several with respect to Larry and Martha. If the IRS does collect some, or all, of the tax debt from Larry he may have an action against Martha but such an action does not involve the IRS.
In evaluating the tax debt associated with a joint tax return the initial issue to consider is whether there was a filing of a valid joint tax return. If there was no valid joint tax return filed there is no issue of joint and several liability.
So under what circumstances would a joint return be considered a “valid” tax return? The general rule followed by the IRS is whether the couple intended to file a joint tax return.
Here’s a list of some factors considered by the IRS:
- Were the individuals legally married for the tax year
- Were the tax returns signed by both spouses - note however courts have found an intent to file a joint return without a signature if one spouse authorizes (explicitly or tacitly) the other spouse to sign the tax return
- For returns signed by both spouses did one sign under “duress”
- Was the signature of one spouse forged
- Did one of the spouses file a separate return for the same year
- Did both spouses have a requirement to file taxes - i.e. a stay at home dad with no taxable income would have no requirement to file a tax return
- Were joint tax returns filed in past years
- Did both spouses participate in the preparation of the tax return
- Was there a tax benefit in filing a joint return
Returning to our example - what if Martha prepared the joint tax return and forged Larrys signature. After the filing can Larry argue that a valid joint tax return was not filed? Most likely the IRS would not agree with this argument.
If this argument is made the IRS will ask Larry for a copy of his individual tax return for the year. If Larry earned income and is arguing the joint return is invalid he should have prepared a separate tax return. If he did not file a return his request to invalidate the joint return will most likely be denied.
A joint tax return can be elected after filing as Married Filing Separately but once a joint return is filed there is no option to change to filing separately. So if in doubt file separately.
If a joint return is filed and a tax debt arises relief for one spouse can only be requested under rules referred to as Innocent Spouse provisions. Stay tuned - I’ll discuss these provision in the next post.
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Link to Outline Slides: Outline - Marriage and Taxes
Link to Video: Video - Marriage And Taxes
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