Basically speaking if there is no equity in the home or any other assets, the IRS will release the lien because the lien cannot attach to post-petition equity or post-petition acquired property. I made a video with more info about this situation which you can access at the link below.
The basic answer is that you will need to file a form 8379 Injured Spouse Allocation in order to get your wife's income tax refund back from the IRS. You are correct in stating that it is unfair for the IRS to keep your wife's portion of the joint refund and allocate that toward your child support payment. In the future, you can file the form 8379 with your tax return in the hopes that her refund won't be delayed as long as it has been this year.
Unfortunately, Congress has passed a statute removing the courts from this process. See IRC §6331. I have posted a copy below for your information.
§ 6331. Levy and distraint
(a) Authority of Secretary
If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to...
Make sure to send it timely and via certified mail. You must make your position so simple that a child could understand it. And use as much documentation as you possibly can. You will likely end up with splitting the difference with the IRS.
It seems to me that you would qualify for "hardship status" or currently not collectible. If you contact the IRS by telephone, they will want to get certain financial information from you. But if you're not working and your wife is only earning $20,000 per year, it seems to me that there would not be enough left over (using the IRS standards) for them to expect anything from you at this time.
I don't have an answer for the checks. You have to decide what's cheaper, getting the checks or the...
I assume you mean Married Filing Separately. In most states, including Colorado, you will not be held liable for your husband's taxes FOR THAT TAX YEAR. If you have filed jointly in the past and have balances due, you will of course be liable for those joint liabilities.
In such a situation it seems likely that the IRS is in receipt of some documentation that leads them to believe that you did have a filing requirement (eg. a form 1099-MISC). If you do call them, try to keep the questioning to a minimum and simply ask them to send you the Payor Information for that tax year. This should provide you with the answer to why they think you were responsible for filing a tax return.
The Collection Statute of Limitations for the collection of tax is ten years. The IRS only has ten years from the assessment of the tax to collect it. This expiration is automatic but there are MANY exceptions that can extend the time limit. You cannot be assured that since the tax year in question was 1997 (for example) that the collection statute has expired.