On Taxes and Divorce: What are you responsible for?

Everybody knows that next to shagging rights, the right to file a joint tax return with one’s spouse is one of the best perks of holy matrimony. But it can also be a landmine when you are dealing with a less than honest spouse who tries to cheat the IRS. If you knowingly go along with the robbery, you can be held jointly and severally liable for the taxes. And you can be held accountable to the fullest extent of the law, including having to do jail time.
But it’s not as if you are completely at your husband’s mercy on this. I know I always make the husbands the bad guys and that’s so wrong, but it’s more fun when men are the bad guys.  And let’s face it, it is generally they still run the show in relationships and marriages, and they often hold the money bag; it is generally they who tell us what our financial game plan is going to be; and it is generally they who have the “head” for stuff like taxes. They are still the primary bread winner in most relationships, as a general rule. Even when two highly educated power brokers marry, if anyone stays home with the kids, its usually the woman, still. It is usually she who gives up her career to stay home and be a good wife. I mean, look at Marie Douglas David who was an asset manager before she married the head of United Technologies. Now people are talking about her as if she is a gold-digging air head without a job. And why? Because she stayed home and deferred to her husband’s income, support and wealth. I bet you he is the one who handled all the taxes in that marriage. And frankly, many women, even highly educated ones, find it easier to make their man do his thing. And I don’t have a big problem with that. Actually in some significant ways, I am still very old fashioned, and very much a traditionalist…But a wife does have to be careful. You can’t completely leave it all up to him – easy and seductive though that might be.
But, when it comes to the taxes, the joint taxes specifically, one has to be careful. Because once a wife puts her signature on a joint tax return, she is on the hook for whatever is in it. But I was just reading an article by Ginita Wall, CPA, CFP, CDS about the “innocent spouse rules” which are making it easier for wives and husbands  to limit their liability on a joint return to their separate liability to only those items which they knew and had personal knowledge of. In other words, if they didn’t know the taxes were understated, and they can prove it, they will not be held liable.

According to the author, in order qualify for the separate liability election, the taxpayer must be “divorced, legally separated or living apart from her spouse for at least a year at the time she files the election. The election must be made within two years after the IRS begins collection efforts against the innocent spouse. But even if the spouse fails these tests, the IRS can grant relief from tax liability if, based on all the facts and circumstances, it is inequitable to hold her liable.”

  You must be prepared to show that you didn’t benefit from the understatement of the taxes, that you were not the one responsible for the under-reporting, and that you have not been ordered to pay these taxes in your judgment of divorce.