Divorce leaves a mess in its tracks. Marriages that dissolve under the best of terms can still be financially difficult to square away. Unpaid bills and IOUs pop up for years, for example, but there is help.
Separation of liability relief is a tool provided by the Internal Revenue Service (IRS) to help with tax debt during divorce. Married couples can find they owe the IRS money from issues such as improper claiming of credits, overstatement of deductions, or under-reporting income. The IRS still wants that money, even if the couple divorces. A spouse can claim a separation of liability relief in some cases. This means the debt can be divided between spouses, with each only responsible for their portion, based on specific criteria. It’s a handy tool with some definite perks.
The IRS has several requirements, qualifications, and key points you need to know if you owe tax debt in your marriage. This guide will break down what separation liability relief is, how it can help you, and how to find out if you qualify.
The Basics of Separation of Liability Relief
Separation of liability can be a big help when your divorce is taking a financial toll. The IRS allocates each spouse’s portion of their tax debt depending on their income, assets, and deductions. It typically isn’t just split 50/50. You could therefore end up owing significantly less than you anticipated.
It should also be made clear that this is not a means to get a refund. You will not get back any money you’ve already paid, so filing a claim for it will be fruitless.
Nothing comes easy with the IRS, and you have to put in some work to claim this benefit. It’s worth the effort in many cases, though.
Determining Whether You Qualify
You must fulfill the requirements set forth by the IRS to claim separation of liability relief. There are a few significant hurdles and a deadline:
- You must adhere to all these requirements strictly and meet the deadline to receive separation of liability relief.
- Ensuring you meet all the requirements is vital, so double-check all your documentation.
- Separation of liability relief can add some unneeded confusion during a divorce, but it’s worth exploring nonetheless.
- Failure to take advantage of this could potentially cost you thousands of dollars or more. If you’re not 100% confident that you understand the rules and requirements, ask a tax expert for help.
Separation of liability claims are not a sure thing, however, as the IRS can refuse your request. That’s why it’s vital to make sure you have all your documentation and claim filed in order and on time.
5 Qualifications for Separation of Liability Relief
You’ve found you have a joint liability due to under-reporting, claiming unentitled credits, or overstating deductions. Begin the process of relief by meeting all qualifications. The qualifications for separation of liability relief aren’t very complex, but they are stringent.
1. You Must Have Filed a Joint Return With Your Ex-Spouse in the Past
The IRS requires that you had a connection to your spouse when the tax obligation occurred, so the agency requires that you filed your returns jointly. You must also be partially responsible for the debt allotted to you as a couple.
2. You Must Owe a Debt to the IRS for Understatement of Taxes
This provision only applies to those who owe the IRS after a divorce. Anyone seeking to address some other tax-debt situation using this approach will be denied.
3. You Have to Be Divorced or Legally Separated and Living Apart
The IRS has to be sure the marriage is over and there is no chance it will be resurrected. You should be living separately for at least 12 months and be able to prove it before making a claim.
4. File a Request for Separation of Liability Relief 2 Years After the First IRS Collection
Filing a request for separation of liability relief any later than two years from the date of the first IRS collection against you can result in a denial.
5. No Knowledge of Aberrant Income
You can’t have any knowledge of the unreported income, overstated deductions, or improperly claimed credits that resulted in IRS debt during the marriage.
The chances are good that you will be granted a separation of liability relief if you meet the above requirements. There are some reasons that your request could be denied, however.
Denial of Relief by Separation of Liability
The separation of liability provision is meant to give relief to someone who faces unfair burdens because of the actions of a spouse. The IRS will, in most cases, deny a claim if the spouse seeking relief was complicit in the actions that led to the debt. The following are a few things they will look for:
- There is evidence that you and your spouse transferred assets to a third party to avoid paying taxes.
- There is evidence that you were fully aware of the unreported income, overstated deductions, or ill-claimed credits that resulted in an IRS debt.
- There is evidence that your spouse transferred assets to you in a fraudulent scheme to avoid paying taxes.
A denial of your request for separation of liability relief is a tough pill to swallow, but there are a few options if you’re turned down. There are similar IRS relief options and related areas to explore, such as innocent spouse relief, equitable relief, and signature under duress or forged signature claims. A tax expert can help you find the best option for your situation.
Contact a Tax Attorney for Help
Divorce is difficult enough without having to figure out the tax implications, so having an experienced professional on your side is invaluable. The Silver Tax Group has a proven track record of success in divorce tax cases and a team of tax pros who can get you the best outcome with the IRS.
Contact Silver Tax Group today to speak with an expert in divorce-related tax issues or any other taxation questions.
