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Posted on Aug 26, 2009 in Offer in Compromise, Tax Q&A | 0 comments

Divorce and Taxes

Recently I read about a divorce matter where the couple had a large amount of IRS tax debt jointly, but in the divorce agreement, one of the parties (the husband, let’s assume) agreed to take on all of the tax debt and hold the wife harmless.  You know what happened next, don’t you.  Husband did not take care of the taxes as he promised and now the IRS has come knocking on the wife’s door.  Is she protected?  Should she just show them her divorce decree?  Will that make the IRS turn around, leave her alone and start to collect from her ex-husband?

Unfortunately not.

Because the taxes were filed jointly and because the IRS is a federal agency, they are not bound by the state family court order.  So husband and wife are still both jointly and severally liable for the entire tax debt.  The IRS won’t even split it up and say you are in charge of half and your husband is responsible for the other half.

While that doesn’t seem fair, the wife does have some recourse against the husband – just not through the IRS and she is not relieved from paying the IRS.  In South Carolina (and I assume this applies in all other states) the wife would take her ex-husband back to family court for his breach of the court order.  This is called contempt and here in South Carolina, husband could be penalized with a jail term, by paying a fine or by being ordered to complete community service.

Before the wife can hold husband in contempt, she would generally have to show a financial loss.  That means she would have to come out of pocket with some money.  Depending on her financial situation, wife may qualify for an offer in compromise where she gets the IRS to agree to accept some amount less than what she owes them for full settlement.