The debt incurred by an individual is owed only by that specific individual. However, a person can be liable for a spouse’s debt in two ways. First, in community property states, assets that are jointly held in community property can be used to pay off debts. Secondly, taxes owed can also become a liability for both spouses if they have chosen to file joint tax returns.
The Impact of Filing Joint Tax Returns
Married couples who file joint tax returns are jointly and severally liable for taxes due. This means that even if the tax debt is a result of only one spouse’s actions, the other is equally liable.
The Innocent Spouse Defense
Recognizing that joint and several liability for taxes can result in an unfair burden on one spouse, Congress established the Innocent Spouse Defense to discharge an "innocent" spouse of unfair liabilities.
There are five elements of the Innocent Spouse Defense which must be met:
- Joint tax return must be filed for each year in question
- On each return there must be a substantial understatement of tax attributable to erroneous items listed by the non-innocent spouse
- In signing the returns, the innocent spouse must not know and have no reason to know about the understatements
- Holding the innocent spouse liable would be inequitable
- Defense is asserted within two years after IRS has started collection activities
When Can the Defense Apply in Bankruptcy Proceedings?
Generally, the courts have evaluated three different scenarios when determining whether the Innocent Spouse Defense can apply in a bankruptcy proceeding:
- If both taxpayers were debtors in bankruptcy, then the court has jurisdiction to determine whether the defense applies.
- If the "innocent"party is in bankruptcy but the non-innocent spouse is not, then the court has jurisdiction to determine whether the defense applies.
- If the "innocent" party is NOT in bankruptcy, then the court would likely not have jurisdiction to apply the defense.
How Does the Court Determine Whether the Defense Succeeds?
If the court has jurisdiction to consider the innocent spouse defense, the evaluation will turn on the specifics of the substantial understatement as well as the knowledge requirements – what the innocent spouse knew, didn’t know, and should have known. This evaluation can be difficult and the courts have been split in their findings. Usually, the determination depends on the particular facts and circumstances of the case.
What Happens If the Defense Succeeds?
The court can grant full relief to the innocent spouse either in full or in apportionment.
What If I Am No Longer Married?
For purposes of this defense, innocent spouses who are no longer married to, are legally separated from, living apart from for at least 12 months, or who are widowed, are considered no longer married. They can assert the Innocent Spouse Defense to limit their liability.
Do I Need an Attorney?
The application of the innocent spouse defense varies by jurisdiction. If you are an innocent spouse facing bankruptcy proceedings and tax liabilities as a result of your spouse’s actions, you should consult an experienced family law attorney to determine whether your liability can be reduced or eliminated.