Why a Divorce Agreement May Not Provide Relief from Joint Tax Liability

There has been a recent rise in “gray divorce” – a buzzword coined for those couples divorcing after the age of 50, many of whom have been together for a number of decades.  The number of divorces in this age group may be increasing, but this does not change the unique challenges faced by these splitting couples. After all, the longer you are married the more intertwined your life, finances and obligations.

For many of these couples, the woman is at an additional disadvantage. While more and more women are nurturing their own careers and playing an active role in financial planning, there was a time when this wasn’t necessarily the case, and many women deferred the handling of financial matters to their husbands. While this may have made sense at the time, especially in a single income household, it can cause a number of tax related problems when a couple decides to divorce.

Regardless of which spouse is the accountable party, if one partner handled the brunt of the financial matters and was solely responsible for filing taxes on the other’s behalf, there may be some surprises when it comes time to separate. After years spent deferring the financial obligations, you may be surprised at the state of your joint finances – which are equally your responsibility, regardless whether or not you played a role in their management during the marriage.

If one partner makes poor financial decisions on behalf of a couple, his or her bad decisions will impact both parties if they decide to divorce. Even if the offending partner takes accountability for his or her actions and the Separation Agreement specifies that the responsible party will pay back taxes or other financial obligations incurred, the unsuspecting party may still be liable in the eyes of the Internal Revenue Service.

Because a divorce agreement is between two spouses, it does not hold weight with the IRS. Even if it is clear in the Separation Agreement that one partner is financially responsible for money owed and that party fails to pay the debt, the other party certainly may take them back to court, but that will not change the innocent spouse’s standing with the IRS.

But there is something you can do about it. First, don’t be too hard on yourself. Filing a joint return, when married, makes a lot of sense.  It may mean saving money on taxes. According to Reuters, approximately 95% of married couples file using this joint status, even when both work and they have the option to file separately.

Second, there is still hope. Innocent Spouse Relief (if you qualify) affords you a release from taxes owed if your spouse failed to report income or otherwise improperly filed taxes. In order to qualify for innocent spouse relief, you must meet a number of conditions and you must request this relief no more than two years from the first attempt by the IRS to collect the tax.