When divorce and tax debt collide

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There are two common issues that arise when divorce and tax debt collide. One involves a spouse who finds out that he or she is on the hook for significant tax debt after signing jointly filed tax returns that were fraudulently prepared by the soon-to-be ex-spouse.

The other scenario involves a couple who has many years of unfiled tax debts and are wondering if the unfiled tax returns for the back taxes should be filed as joint tax returns or married filing separate returns.

When it comes to the first scenario, the good news is that the IRS changed its rules in 2013 and now makes it easier for innocent spouses to be let off of the hook for the other spouse’s bad deeds.

Innocent Spouse Relief may be an option when the following requirements are met:

  1. The tax return was filed jointly.
  2. You ask for Innocent Spouse Relief within 10 years.
  3. You did not know the return filed was false when you signed it.
  4. You were not part of a fraudulent transfer.

If you can meet all of these requirements, the IRS may grant you Innocent Spouse Relief after considering a number of other criteria, including economic hardship, current marital status, your subsequent compliance with tax law, your mental or physical health, and your knowledge of the tax issue.

When it comes to the second scenario, the simple answer is that it is often best to file unfiled tax returns jointly instead of married filing separately because it often results in a lower overall tax bill.

Of course, anyone facing either one of these situations will want to discuss the specific facts of their case with an experienced tax lawyer to help procure the best outcome.

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