I signed a separation agreement stating I would pay half of our joint liability tax debt. Can I settle my half of this debt?
3 attorney answers
Let's use the following illustration to make this simpler and verify that I have the facts and your question correct: You ("TPH - "Taxpayer Husband") and your ex-wife ("TPW - Taxpayer Wife") owe $100,000 for joint income tax returns filed during the time you were married. Your Marital Separation Agreement ("MSA") states that you will each pay the IRS $50k. Now, you want to approach the IRS and tell them two things: (1) I don't owe you $100k, I only owe $50k because TPW and I agreed to split our joint liability down the middle, and (2) will you take "X" instead of $50k?
As to the first question, it's not going to go over real big at the Service. When you file a joint income tax return you create joint and several liability for the resulting tax liability. That means the Service can collect $100k from you and $0 from TPW, or $100k from TPW and nothing from you, $50k from each of you, or any other distribution along that continuum. The Service was not a party to your MSA and is not bound by the terms therein. The only ways you can sever a joint liability to the IRS are (1) through the innocent spouse procedures in IRC 6015, (2) bankruptcy, or (3) an OIC by one of the spouses. But until one of those three things happens, the IRS is going to try to collect the entire $100k from you.
To answer the second question, the IRS will compromise tax liabilities if you can show that you can't afford to pay them in full over the remaining life of the statute of limitations on collection. Very few people manage to make this showing, which is why the IRS accepts less than 5% of all OICs filed. If you were to reach a settlement with the IRS for $25k, then you may be held in breach of the MSA, under which you are obligated to $50k.
Your question also states that there are civil penalties involved and you are considering bankruptcy. I respectfully submit that all of these issues make your case one that requires the assistance of an attorney. You need someone to look at all of the issues, explore your current situation, and help come up with and implement a plan for dealing with all these disparate issues in a coherent and effective manner. When you are talking about bankruptcy and possibly breaching the terms of an MSA, you are considering drastic steps that cannot be undone easily. Please reach out to an attorney and get some real help with your case.
This answer is NOT legal advice and may not be relied upon by anyone for any purpose. Nor does this answer create or indicate an attorney/client relationship or an offer to form such a relationship. No information in this answer is offered in order to assist any taxpayer with an effort to defeat the assessment or collection of any tax, in accordance with Treasury Department Circular 230. If you wish to consult with me please contact me at [email protected] or visit our firm's website at www.bjhaynes.com.
If you are now divorced, and you successfully complete an offer in compromise, you will owe nothing to the IRS. However, your ex-spouse will still owe the entire amount of the tax less whatever you paid to the IRS with your offer. If the remaining amount is more than half of the original amount, you could be forced to pay reimbursement. This should not preclude you from considering submitting the offer, however.
This is not intended to be legal advice, and is general in nature.
Divorced couples are generally jointly and severally liable for the entire amount of tax debts that arose during marriage. Therefore, if you filed an offer in compromise you would want to compromise the entire amount of the tax debt. It must be noted that the size of your offer does not depend on the total amount of your tax debt; it only depends on your ability to pay. In other words, you will generally offer the same amount in your OIC whether you owe $10,000 or $1 million. So you should offer in compromise your entire civil penalty tax debt (if you can) and your income tax debt. I don't know whether there is an offer in compromise for property tax debt in Virginia.
The IRS is not required to honor the type of debt splitting in your separation agreement. However, you could enforce the agreement through the family and civil courts of your state.