LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW
Published October 1st, 2024
Topic: ”Is There Any Tax Relief Available From Spousal Tax Debt”
Attorney Coleman Jackson
Welcome to Legal Thoughts my name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.
In addition to myself, we have Legal Assistants, Leiliane Godeiro, Ayesha Jain and Law Clerk, Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.
On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me on this very important topic impacting many couples in America :“Is There Any Tax Relief Available From Spousal Tax Debt. ”
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Interviewer Mlaah Singh
Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business law, contracts, disputes resolution and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206. Our English phone number is 214-599-0431 and our dedicated Spanish language line is 214-599-0432.
Good morning Attorney; In this very blog, I will be talking with you about an extremely important topic; that I think, every married couple in our Legal Thoughts Podcast audience need to know about. This blog deals with what are the liabilities and consequences of marrying someone or being married to someone who owes the IRS. Is there any relief from tax debt owed by ones spouse?
I look forward to interviewing you today. I intend to ask you questions today designed to help our listeners understand what tax consequences exist for folks who are either contemplating marrying someone, or those who ae already married to someone with huge outstanding IRS tax debt. Are these individuals held responsible for their spouse’s tax bills? This is a big deal, so, Attorney lets get started.
Interviewer Comments: Attorney Jackson, it is my understanding that there could be tax consequences when someone marry or are married to a spouse who have tax problems with the Internal Revenue Service.
Interviewer Question No 1:
Attorney Jackson, can you take some time to explain what tax obligations might exist for couples with outstanding tax problems related to their spouse’s financial activities either prior to marriage or during marriage? Our listeners need to (1) understand where they fall, and (2) how their spouse’s tax problems could create tax liability for them, and (3) what tax relief, if any, may be available to them if they find themselves married to someone with IRS tax problems?
Attorney Coleman Jackson
Good morning Mlaah and hi everybody in our audience today. I am going to take your three ‘questions in one’ as you have organized them:
First, when a taxpayer is contemplating marrying someone or is married to someone owing IRS tax debt; how they are impacted by each others tax debts are going to depend upon the state’s marriage and property laws of the state where they are domiciled. Where a taxpayer is domiciled is determined by a multiple of factors that essentially centers around where the taxpayer has a permanent legal home that the taxpayer intends to use for an indefinite period of time, and if absent, a home where the taxpayer intends to return. Taxpayers can only have one domicile at a time even if the taxpayer own or rent numerous homes around the country. Moreover, whether a couple is married is determined by state marriage laws which may be different from state to state. We don’t have federal marriage laws in the United States. For example, Texas recognizes informal marriages whereas most of the states in the U.S. does not. So, if the couple meet the legal requirements for an informal marriage and are domiciled in Texas, they could be considered married for federal tax purposes although they have not entered into a formal marriage. Texas recognizes informal marriages (common-law), formal marriages and a couple of other types of marriage arrangements, all of which are defined and governed by the Texas Family Code. So, our analysis and inquiry in answering your first question must begin with where is the couple domiciled and what are the applicable State’s marriage relationship laws in their state of domicile.
Therefore, the property codes of the applicable state where the couple is domiciled will impact how the couple will be impacted by the IRS tax debt of their respective spouse. In the United States, we have Separate Property Jurisdictions and Community Property Jurisdictions. There are about 9 community property states, 2 elective community property states and the rest of the states are Separate Property States. Texas is one of the 9 community property jurisdictions. Community Property Laws has a direct and material effect on federal tax liability as it applies to married couples.
This fact alone makes this a complex legal issue; and I am going to limit the rest of my response to the implications spouse IRS debt during marriage to taxpayers or couples residing in the state of Texas. Different rules might apply in other community property law states, elective community property states and certainly different rules apply to federal taxes in separate property states.
So, in staying with our Texas marriage and community property jurisdiction rules, let us move forward to your ‘second question in one’. Mlaah, as for your second question: How someone spouse’s federal tax problems could create personal tax liability?
That is an excellent question. I remind our audience that I am only going to address taxpayers residing in the community property jurisdiction of Texas. This is not because we don’t represent taxpayers from anywhere in the country or world for that matter in federal tax planning, estate and asset protection and international, federal and state and local tax controversies. I am limiting this podcast discussion to Texas because this area of tax law is too complex to cover all 50 states of the United States in a single podcast episode. I am attempting to keep something simple that is not simple. There is nothing simple about federal tax law as it intertwines with state family laws, estate laws and property laws. So let’s talk about Texas, where in general, with few exceptions, property acquired by a couple residing in Texas during marriage is equally owned by both spouses. That includes property, such as wages, income, salaries, earnings, and so forth which has serious federal tax implications.
■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.001 defines a spouse’s separate property as:
–1- the property owned or claimed by the spouse before marriage;
–2- the property acquired by the spouse during marriage by gift, devise, or descent; and
–3- the recovery of personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.
■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.002 defines community property as any property, other than separate property, acquired by either spouse during marriage.
■Texas Family Code, Title 1, Subtitle B, Chapter 3, Subchapter A, Section 3.003 states that property possessed by either spouse during or on dissolution of marriage is presumed to be community property. The degree of proof necessary to establish that the property is separate property is clear and convincing evidence.
So, what does all of this have do with federal tax law. Internal Revenue Code Section 61 says that generally, gross income means income from all sources from whatever source derived. Therefore, gross income includes wages, earnings, salaries, rents, dividends, and practically from any source you can think of. Gross income is an all inclusive notion; if you leave some increment of wealth out when reporting your gross income to the IRS; you, for sure could incur negligence penalties, fraud penalties and even risk prosecution for criminal tax fraud or evasion. The definition of gross income is very broad in federal tax law– it includes practically any increment in wealth. Further under federal tax law, community income is income from community property, which includes, salaries, wages, and other pay received for services performed by the taxpayer, the taxpayer’s spouse, or both during the marriage in a Community Property Jurisdiction, like Texas. Married individuals residing in community property jurisdictions, like Texas, do not have to file a joint tax return to be liable for one-half the tax owed on their spouse’s wages, income from business, rents, royalties, dividends, discharge from debts and the list of income included in gross-income goes on and on– increments of wealth is what we are talking about here. Married couples are liable for one-half of the community income; with very few exceptions, such as except for, when the couple are living apart during the tax year, or one spouse acted as if they were solely entitled to the community income, or when the spouse otherwise qualifies for some form of equitable tax relief. The main point I am making here is that in a community property jurisdiction, married couples are liable for one-half of the federal taxes on community income even though they do not file a joint spousal tax return. Word to the wise, you are liable for the one-half of your spouse’s income, even though you file a separate tax return.
Mlaah, these are some of the federal tax consequences for couples residing in a community property jurisdiction, like Texas. Texas is one of the 9 community property states. The other community property jurisdictions are Arizona, California, Idaho, Louisiana, Nevada and New Mexico. I remind our audience that property laws and marital laws are State specific in the United States. The federal tax laws do not define whether you are married or not married. These determinations are left to the several states. I am limiting my discussion in this particular podcast to the marital and community property laws in the state of Texas. Now let me turn to your final question, Mlaah: Question No 3 in one.
Question Number 3 in one: what tax relief, if any, may be available to a spouse if they find themselves married to someone with IRS tax problems?
The Internal Revenue Code provides essentially two types of tax relief to taxpayers who find themselves liable for their spouse’s federal tax debt. Again the practical application of relief available will depend upon whether the taxpayer is domiciled in a community property jurisdiction, like Texas, California or Idaho- for examples; or whether the couple is domiciled in a separate property jurisdiction, such as, Connecticut, New York, Virginia, Michigan for examples.
The Internal Revenue Code permits the Internal Revenue Service to provide broadly two forms of relief to taxpayer’s who might be caught up in tax problems resulting from their spouse’s financial activities:
■The first form of federal tax relief available is referred to in federal tax law as Injured Spouse Relief. Injured Spouse Relief applies when a couple files a joint federal tax return and their spouse owes prior federal tax debt, delinquent child support payments, delinquent student loans or various other types of debts subject to offset. The Injured spouse’s refund could be reduced or offset in its entirety by the prior federal tax debt owed by their spouse. Moreover, the injured spouse’s expected tax return could also be reduced by non-federal tax debt owed by their spouse, such as, back child support payments and delinquent student loan debt or any other debt obligations where Congress has authorized the IRS to offset against taxpayer’s refunds.
■Note the statute of limitations to file a well supported Injured Spouse Relief claim with the Internal Revenue Service is the same as for filing a refund claim generally; which is two-years from the date the overpayment was made or three-years from the due date of the return plus any extensions filed.
■The second form of tax relief available is referred to in federal tax law as Innocent Spouse Tax Relief. Innocent Spouse relief is an equitable relief from federal income tax liability available when a spouse meets certain eligibility thresholds codified in Internal Revenue Code Section 66. They are too complex for me to explain in this podcast presentation today.
■Innocent Spouse Relief is available for couples regardless whether they filed joint tax returns or not. However the Innocent Spouse tax relief rules are totally different depending upon whether the innocent spouse is domiciled in a separate property jurisdiction, like New York; or whether the innocent spouse is domiciled in a community property jurisdiction, like Texas. Situations where a spouse is relieved of federal tax liability can turn on whether the spouse had knowledge or notice of their spouse tax or whether they filed a joint tax return or, whether the spouse who is trying to avoid liability for community income can satisfy all of the eligibility criteria in Internal Revenue Code Sections 66(c) and 879(a).
■I am not going to go any deeper than this because our Legal Thoughts Podcast audience with questions can send an inquiry from our law firm’s website www.cjacksonlaw.com or simply call (214) 599-0431,
Interviewer Mlaah Singh
Interviewer Question No 2:
What types of notices might individuals receive in the mail? How can one approach the IRS regarding late payments or extenuating circumstances?
Attorney Coleman Jackson
Mlaah, the types of notices that the taxpayer might receive are too numerous for me to discuss them all in this podcast. You make a very good point by asking when preferencing your question on “notices received by mail” because lots of scammers may attempt to trick taxpayers by sending purported notices from the IRS by email, text or other methods. The IRS communicates with taxpayers by mail; but never, by text or email.
So, when you receive mail or any correspondence purportedly from the IRS, you should call the IRS Local Office. If you have any suspicions as to whether the correspondence is from the IRS, you need to verify it directly with the IRS using a contact number for the IRS from an independent source other than the contact information listed in the correspondence. There are lots of scammers out there. We have received numerous inquiries from clients and prospective clients about correspondence that they have received purportedly from the IRS. Many times; particularly in recent years with all this lying and thievery of today, this correspondence was not from the IRS but from advertisers, marketers and other scammers. Word to the wise call the IRS directly or call a lawyer before you interact with any correspondence. You must take correspondence from the IRS very seriously. Do not ignore it. You must inquire and check it out because if the notice is from the IRS; you must preserve your rights in a timely manner. Rather than trying to list all the types of notices a taxpayer may receive from the IRS; I rather answer your question, Mlaah, this way. Your question is an excellent one!
Now let me address the other part of your question—”How can a taxpayer approach the IRS regarding late payments or extenuating circumstances?”
As for members of our audience who have IRS tax problems; seek legal representation immediately. Do not procrastinate because you will miss critical deadlines and the ability to satisfactorily solve the problem only gets worst if not properly tended to. Delinquent taxes and IRS tax problems are kind of like unattended physical illnesses. Both of these situations tend to get worst if unattended. Over years of law practice, I have seen taxpayers loose their businesses, their health and their families by ignoring their tax obligations. I have also noticed that many taxpayers do not know how to deal with the IRS without professional counsel. I am not saying this is the case for all taxpayers; but, it is not uncommon to see taxpayers who have made their tax situation worst by ignorance of tax law and the process or worst by neglect and ignorance of the process.
Final word to the wise: Correspondence from the IRS could come from the Civil Division and/or the Criminal Investigation Division. It is critical to know, right from the start, which division of the IRS is contacting you.
Interviewer Mlaah Singh
Interviewer Question No 3:
What is a joint return? How can spouses work together to file a joint return?
Attorney Coleman Jackson
Thanks Mlaah for these wonderful questions. What is a joint return? How can spouses work together to file a joint return?
■First Question, the term “joint return” simply means two individuals file a single or combined tax return with the Internal Revenue Service. Individuals who are married to each other can agree to file a joint tax return; so long as, they generally meet one of the following factual eligibility requirements based on the applicable law of the jurisdiction of their domicile:
–1. married and living together as husband and wife;
–2. common-law marriage recognized in the state where their common-law marriage began or where they currently is domiciled;
–3. separated in an interlocutory divorce under the laws where they are currently domiciled; or
–4. married but living separate under the law of the jurisdiction of their domicile but not under a final divorce decree or separation agreement.
■Second Question: how can spouses work together to file a joint tax return? This is a complex question depending upon the couple, their financial situation and lots and lots of other factors too numerous to list or perhaps even identify at the moment. Basically a couples tax decisions like anything else within a marital relationship are extremely personal and is difficult to speak in specifics. So generally, couples must be truthful, candid and open with one another and communicate and work together in unity. Individuals cannot file a joint tax return with the IRS unless they both agree to do so. Agreement requires cooperation and equality in the relationship. One spouse should not attempt to force their will on their spouse when choosing how to file taxes no more than in any other family decision. Family calls for unity.
■Finally, let me conclude, by saying, that sometimes it is not in the best interest of a family to file joint tax returns because both spouses will generally be jointly and severability liable for the full amount of the tax debt owed. Sometimes, couples should agree to file ‘married but filing separate’ for a multitude of excellent reasons. Members of our podcast audience with questions about whether they should file joint returns should discuss these filing options with a qualified professional tax counselor and advisor. Filing a joint tax return could have unintended consequences.
Interviewer Mlaah Singh
Attorney, thank you for sitting with me this morning in our podcast discussing IRS tax liability of couples, and potential IRS tax relief available to injured and innocent spouses. Hopefully our listeners now have a better understanding of interactions with the IRS and understanding how the law might apply to them if they find themselves liable for their spouse’s prior or current federal tax debt. Folks, stay tune for upcoming Legal Thoughts Podcasts on future internal tax, federal tax, state and local tax and beneficial ownership information reporting requirements due by January 1, 2025 by most small and medium-sized businesses in America! Hey, if you have a small or medium-sized business operating in Texas or anywhere in America; listen up– Attorney Jackson has written numerous blogs on this topic; our law firm has produced numerous podcast over the last 18 to 24 months sending out the alert to our Small and Medium-Sized Business Owners! Check out our discussions about the Corporate Transparency Act on our blog site, or on our podcast site or simply give Attorney Jackson a call.
Our audience can send us inquires at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our U-tube Channel. You can send an email directly to attorney at cj@cjacksonlaw.com and suggest other tax topics that you want us to discuss in future Legal Thoughts Podcast. We are open to your ideas for topics in tax and business law.
Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
English callers: 214-599-0431 | Spanish callers: 214-599-0432
Attorney Coleman Jackson
This is the end of “LEGAL THOUGHTS” for now
Thanks for listening everybody!
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