It’s tax season. Time to gather your financial documents, visit the accountant, sign on the dotted line, and submit your income tax return to the Internal Revenue Service. For many, the process can be frustrating, as the tax code seems to get increasingly complex each year. A pending divorce can complicate matters even more.
If you’re in the process of divorcing –or even thinking that you might be soon –you need to answer this critical question: Is it in your best financial interest to file a joint tax return with your husband?
Consider the pros and cons carefully, because filing jointly can have a dramatic impact on your future finances. Be aware that:
- When you file jointly, you and your husband are both financially responsible. If it comes to light later that taxes have been underpaid, it won’t matter to the IRS which of you was responsible. When you file jointly, the government can go after you both… even if you didn’t personally earn one dime of the reported income! What’s more, you will still be liable for errors and omissions in joint tax returns even after your divorce.
- The IRS is not bound by the terms of your divorce settlement agreement. Some women insist that their divorce settlement agreements should include a provision that if there are tax issues to be rectified down the road, their ex-husbands are responsible. On the surface, that sounds reasonable, and you can certainly hope that your husband would abide by such a provision. Understand, however, that the IRS is not bound by your divorce settlement agreement, no matter what it says about who is responsible for taxes. As far as the government is concerned, if you’ve signed the tax return, you own the consequences… and if taxes are owed, you can be sure they will come after you, as well as your ex, for payment.
- You may not know what your husband is hiding. If your husband has hidden assets, underreported income, claimed improper deductions or tax credits, and/or engaged in other dishonest shenanigans, you could be liable. Taxes, interest, and penalties can quickly add up to staggering amounts, and you could find yourself owing the federal (and your state) government many thousands of dollars through no fault of your own.
Is there anything you can do to protect yourself against being pursued for tax debt that isn’t fairly yours? Fortunately, there is:
- If you haven’t filed yet, but are concerned that your husband is not approaching his taxes with total honesty and integrity: Consider filing a separate tax return. Under the provisions for “Married Filing Separate” (MFS) status, you would be responsible only for taxes on income subject to reporting on your individual return. Using MFS status might mean that in total, you and your husband will pay more in taxes than if you’d filed jointly, but believe me, it will be worth it not to be considered responsible for a fraudulent return.
- If you already have filed jointly, but are now concerned that your husband did not approach your return with total honesty and integrity: Consider applying for Innocent Spouse Relief, which may absolve you of responsibility for paying tax, interest, and penalties if your husband is found to have made false statements on your joint return.
The IRS recognizes that there are innocent spouses who sign joint income tax returns unaware that anything was amiss, and further recognizes that these innocent spouses need to be protected. However, obtaining innocent spouse status isn’t necessarily “easy,” and it doesn’t happen in an instant. You will have to prove that at the time you signed the joint tax return, you didn’t know, and further, that you had no reason to know, that there was an understatement of tax. That can be difficult to establish in all but the most black-and-white circumstances. Indeed, you might need a forensic accountant to help make your case.
To decide whether you qualify for relief, the IRS will consider your financial situation, your education and business experience, and even whether or not you asked any questions about items on the return when you signed it. They may determine that you qualify for partial relief, i.e. that you might have known about some of the understated income, but had no reason to know about another portion.
Reminder: When it comes to taxes, my advice is the same as it is with all things financial: Be proactive. The more you know about your family finances, including your husband’s business, the less likely you are to sign a joint tax return you can’t stand behind.
Hot tip: For more information, as well as forms and requirements for applications for Innocent Spouse Relief, visit the IRS’s web page on Tax Information for Innocent Spouses.
Legal matters: Tax evasion and fraud can result in both civil and criminal prosecution. The penalties range from fines to imprisonment, and they’re outlined here.