Beat up Ex-Spouse

[Corduroy Frog]

Mr. XH and Mrs. XW are contemplating filing a prior year tax return. Mr. XH makes a substantial amount of income and Mrs. XW makes virtually nothing. Mrs. XW is agreeing to a MFJ return only in an attempt to save several thousand $ for Mr. XH, who will have to file married and separate otherwise.

How can Mrs. XW avoid joint liability on a MFJ return if she knows the facts prior to signing the joint return? (Example, innocent/injured spouse)

[Kram BergGold]

She Can't

She Can't . Not much else to say.

[ATSMAN]

If I was the Mrs XW's tax adviser I would strongly recommend against filing MFJ for a prior year and also advise her that she may want to discuss the matter with her attorney because as I understand it at the divorce mediation/proceedings the tax issue had to be discussed to finalize the divorce.

[Roland Slugg]

How can Mrs. XW avoid joint liability on a MFJ return?

Well, I don't think she can avoid joint liability, but she can always apply for Innocent Spouse Relief by filing F-8857. Is she asking you for advice here? Your post says she has agreed to file a MFJ return, so I assume she has conferred with her lawyer and wants to do this.

[Corduroy Frog]

Thanks Roland

Thanks Roland. As you might imagine, this is a nasty issue between two ex-spouses, and if XH has to pay a bunch more, then he's going to reduce child support. XW doesn't want that to happen, but is afraid to sign a joint return. I've had to listen to dozens of slinging arguments between the two, but they aren't relevant to the question.

Discussing with lawyers is giving this couple too much credit. Everytime they talk to a lawyer it costs them money. Another session with these two and I'm going to walk away.

From what I've read, if IRS comes after XW, she can file Innocent Spouse, but the question is whether IRS will honor this given the fact that she knew the liability to begin with. If IRS allocates income she won't owe anything...

Thanks for all responses.

[ATSMAN]

Thanks Roland. As you might imagine, this is a nasty issue between two ex-spouses, and if XH has to pay a bunch more, then he's going to reduce child support. XW doesn't want that to happen, but is afraid to sign a joint return. I've had to listen to dozens of slinging arguments between the two, but they aren't relevant to the question.

Discussing with lawyers is giving this couple too much credit. Everytime they talk to a lawyer it costs them money. Another session with these two and I'm going to walk away.

From what I've read, if IRS comes after XW, she can file Innocent Spouse, but the question is whether IRS will honor this given the fact that she knew the liability to begin with. If IRS allocates income she won't owe anything...

Thanks for all responses.

Be cautious! If you give the wrong advice this may come back to haunt you. How can child support be reduced by one of the parents tax bill? At least it my state it is pretty much formula driven based on the income and certain allowances. I don't recall that a tax bill was one of them.

[Corduroy Frog]

Happens All the Time

How can child support be reduced by one of the parents tax bill? At least it my state it is pretty much formula driven based on the income and certain allowances. I don't recall that a tax bill was one of them.

Speaking only for Tennessee, there is an eternal provision for "changed conditions". The courts will re-award a greater or lesser amount depending on circumstances which did not exist at the time of a previous award. The unforeseen requirement, for example, for either party to have to pay $500/month to IRS changes conditions one way or another for people at most common income levels.

The change has to be substantial because:
1) The expense of a lawyer has to be justified to petition the court.
2) If it's not substantial the court will ignore it.

[WhiteOleander]

I would warn her that if the ex husband walks the debt or not, the IRS will come after her for the money. If she gets EIC, that will go for the debt until it's paid. Any refund she receives, will go to pay his debt. And I would bet that will be a much larger sum to lose than a reduction in child support. There is absolutely no way to know if the IRS will accept the innocent spouse claim. But, this case could be hard to prove since they are currently divorced. (at least that is my assumption based on the OP). The sum total of the benefit comes down on the side of the EH with no real benefit to the EW. She will be assuming a headache she may not want. What if he is "Cheater of the Year". She gets drug into it with him. What's her benefit?

[ATSMAN]

Whiteoleander you hit the nail on the head! I would dread getting in the middle of it when you know what hits the fan!

[Corduroy Frog]

Stress the original issue

Thanks to all who have posted. The overwhelming conversation has been about the horrendous possibilities of joint liability, and I do acknowledge what can happen.

The real issue, however, is the likelihood of relief under the innocent spouse provision. From the respondants above, we know XW can file for relief, and that relief is not guaranteed. Do we know any more about the likelihood of relief if XW has no allocable income and no tax liability other than what may arise from the joint and several nature of the MFS return?

For example, are her chances of relief extremely likely, extremely unlikely, conditionally unlikely, etc? There may not be many of us who have experience enough to address this, but I would appreciate any discussion.

[ATSMAN]

Does the ex wife meet these conditions to qualify for "innocent spouse relief":

You establish that at the time you signed the joint return you did not 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 you liable for the understatement of tax

If, at the time you signed the joint return, you had actual knowledge of the item that gave rise to the understatement of tax, you do not qualify for separation of liability relief.

If she likes to roll the dice and take a chance, go for it. If she gets snared you will be spending a lot of time (possibly uncompensated) trying to get her out of that jam. Is it worth it? Only you can decide.

[Corduroy Frog]

I'll be as specific as I can

Atsman, I appreciate the direction of the conversation. From your standpoint it appears the viability of innocent spouse defense depends on how much the ex-wife knew and when she knew it.

XW knows the XH is in tax trouble, and at the time she signs the joint return she will know the exact liability. The liability, however, stems entirely from the business of XH, and she knows virtually nothing about the profitability, income, withdrawals, etc. from that business as she was a housewife with small children and had access only to a personal joint checking account. She claims to have never even made a business transaction. XH confirms that she was ignorant of virtually all affairs.

An auditor is awaiting the tax return, and will audit certain business items upon receipt. It is my understanding that if the auditor plunks yet another large sum to the liability, the innocent spouse relief WILL exhonorate XW from payment of these additional taxes resulting from audit.

[ATSMAN]

Obviously you have a better handle on the facts of this case than I do and since this really is a classic "facts and circumstance" situation, it impossible for us to look in the IRS crystal ball and predict what will happen.

When faced with a situation where the case law is unclear and it is a fact and circumstance case, I explain the pros and cons and let the tax payer decide how much risk they are willing to assume and the consequences. My advice has always been to minimize risk because the possible gain may be very short lived.

I have one client who has been filing MFS since she got remarried 3 years back because her husband came with lot's of business related and tax baggage. The fellow had filed bankruptcy once before. He is in the home construction business (I am not his tax preparer), the wife is not involved in the business directly, but helps out with some bookkeeping, answering phone calls etc. They also maintain a rich lifestyle compared to other clients who are in similar line of business. The first year she got married IRS grabbed almost all his refund because of a school loan default that she had no knowledge!

So my friend at the end you have to decide how much you are willing to stick your neck out for this client.

[TXEA]

The sheer fact that we are worrying about innocent spouse before the return is prepared is enough to have me wash my hands of the whole situation. She has an obligation prior to signing the tax return to review the Schedule C, ask questions, request clarification of items, etc. (particularly if she has reason for concern).

Willful blindness is not an excuse for innocent spouse relief. If there is any concern about H not preparing an accurate tax return, just move on to MFS. Unless H is paying more child support that than the law requires, how does she think he is going to reduce the amount?

Finally, are you preparing this joint tax return? I am unable to determine from the post if you are advising H, W, or both. If both, I hope you have a conflict of interest waiver. And, with the hostility of the divorce, I think it would be null and void.

There is nothing to gain from you giving this advice in this situation. Let the lawyers and the client's figure this out.

[Burke]

I have one client who has been filing MFS since she got remarried 3 years back because her husband came with lot's of business related and tax baggage. The fellow had filed bankruptcy once before. He is in the home construction business (I am not his tax preparer), the wife is not involved in the business directly, but helps out with some bookkeeping, answering phone calls etc. They also maintain a rich lifestyle compared to other clients who are in similar line of business. The first year she got married IRS grabbed almost all his refund because of a school loan default that she had no knowledge!

Wow. I could have written that exact post, except for the rich lifestyle. Same thing happened to client of mine years ago filing MFJ the first year she got married (husband also in construction business -- I don't know if he even files a return, and I don't ask -- he is not my client). They took all the refund to pay his back tax debts. She has filed MFS every year since. She has nothing to do with his business. I am trying to remember if we filed Innocent Spouse request. She was the only one who paid any taxes in. I am thinking she said just forget it. Amazingly, the state automatically sent their recaptured funds back 9 months later with a letter saying they could not use her tax withholding to pay his outstanding tax debts from prior years.