Tax liability can follow spouse even after divorce
Question: For most of our 17- year marriage, my husband either signed my name to our tax returns or brought them to me at one minute until midnight on April 15th of each year. I never worked outside the home. In our divorce settlement, I was given certain property and my ex-husband was required to pay support and alimony. Before we divorced, I was required to sign joint tax returns for 1994 so my husband could pay less income taxes that year. In return, he agreed to hold me harmless from prior years' tax liabilities which my lawyer told me would protect me.
After our divorce in 1995, my ex-husband sold everything and left the state with his girlfriend. He has stopped paying support, and I can't find him. To add to my troubles, now, nearly two years later, I am being hounded by the IRS and state taxing authorities who are attaching my bank accounts and filing liens against my house and property to satisfy past due taxes of nearly $45,000. My divorce lawyer tells me that he is not a tax lawyer and can't help me, but that I should be able to get off the hook because I did nothing wrong. What can I do?
Answer: Although a divorcing couple will pay lower overall taxes if joint tax returns are filed, the hazards of filing a joint return may outweigh the benefit of the tax savings - the biggest hazard being joint and several liability for payment of the taxes. This means that even if one of the spouses did not generate either income or deductions on the return, he or she can be held responsible to pay all of the tax and any additions to the tax solely because he or she signed the joint return. And since the statute of limitations for assessment is three years after filing a timely return (six years, in the case of a gross understatement of income), in the eyes of the IRS, you and your husband continued to be "married" for tax purposes for at least three years from the date you and he filed the last joint tax return.
As you now have found out the hard way, even a well drafted tax/penalty/cost indemnification provision does not bind the IRS, which may pursue collection proceedings against either you or your former husband. It is important to remember that the indemnification provision is effective only to the extent your former husband has reachable assets. That's one reason why it's wise to make sure that a statement is included in the divorce settlement agreement that all tax returns have been filed, that all income has been reported, and that the you are unaware of any other sources of income except those disclosed by your spouse in the agreement.
The Internal Revenue Code provides relief from tax liability to you with an "innocent spouse defense" if you can establish that (1) the understatement is attributable to your ex-husband, (2) when you signed, you did not know -- and had no reason to know - about the understatement, and (3) taking into account all the facts and circumstances, it would not be equitable to hold you liable for the deficiency in taxes attributable to the understatement. But, because the defense is completely subjective and is based on the facts and circumstances that involve your knowledge, actions, and understanding of the return, it is difficult to get innocent spouse status. Factors include: (1) Whether you benefited, either directly or indirectly, from the omitted items (normal support is not a significant benefit), (2) Your level of education, (3) Your involvement in the family's financial affairs, and (4) Whether there were expenditures that should have alerted you to a possible omission. You m
ay want to look into what is known as "the duress defense" - another subjective test -- which will require you to show you were unable to resist demands to sign the tax return and would not have signed it otherwise. A history of spousal abuse will not necessarily result in a successful duress defense.
With all deference to your attorney, as a divorce lawyer, he is charged with the responsibility of protecting clients when it comes to taxation issues. If your lawyer was not aware of the basics involved, he should have recommended that you hire a certified public accountant or tax lawyer who could have assisted you. Your lawyer should have examined prior year's returns to determine whether you were going to assume any potential exposure for tax deficiencies before you signed. And it would have been wise for your lawyer to have obtained and reviewed transcripts of IRS tax accounts for the last three to six years to determine whether your former husband had complied with the tax laws. As with most issues, if quality time had been spent before the fact to deal with these issues, you would not find yourself in this position today.
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