Alice, a nurse in Montana, thought she’d given her husband of 21 years all the confidence with respect to their financial obligations. This trust was irrevocably broken when Alice found out that her husband had secretly kept an $82,000 tax payment meant for the IRS. Now Alice is left in a predicament, having only her nursing job to depend on, and potentially losing the family’s home.
The couple had been through financial problems before, including a previous bankruptcy, but 2021 was a good year for her husband’s real estate business. They had made money, but they also owed $82,000 in federal taxes for that year. The money was available in her husband’s business account, so Alice assumed he would handle the tax payment while she concentrated on her nursing work.
The hidden crisis unfolds
Instead of paying the IRS as agreed, Alice’s husband made a knotty decision: He diverted the tax money to his other business expenses and an ill-fated side endeavor while keeping his wife completely in the dark about everything. Worse than that, he ignored repeated communications by their certified public accountant (CPA) to contact him and actively hid IRS correspondence from Alice.
The couple’s CPA, perturbably frustrated by the husband’s non-response, went on to the extraordinary step of filing their taxes without signatures early in 2023 to avert the imposition of penalties. “This is an illegal act,” warned financial expert Dave Ramsey, “and a good way for the CPA to end up in jail.”
The shocking discovery
Alice’s world fell apart once she signed for a certified letter from the IRS. It stated that the IRS intended to levy their home for an outstanding debt, which had since burgeoned to $150,000. The $82,000 sum had greatly grown with years’ worth of penalties and interests.
“To say I’m blindsided and betrayed,” Alice told The Ramsey Show, “is the smallest of understatements.” She sought guidance about taking out a second mortgage for the bill or selling their home. This discovery came at a time when she was contemplating divorce, making an already desperate situation even more complicated.
Understanding joint tax liability
Alice’s plight exemplifies the hard truth of joint tax filing. Jointly-filing couples are jointly and severally liable for the entire tax amount, be it one spouse earning the income or the two making the mistakes. Meaning, after a divorce, the IRS could collect either spouse for the full amount due.
As one tax expert states, “Both spouses are equally responsible for the return and any taxes and penalties owed.” That responsibility continues even if a divorce decree assigns the tax liability to only one spouse: Such assignments bear no weight in front of the IRS, which can then pursue either party.
The Innocent Spouse Relief option
However, there might be an avenue for Alice to attain relief through the IRS Innocent Spouse Relief program. This Act guards unsuspecting spouses against tax damage incurred by a spouse without their knowledge. Financial expert Dave Ramsey observed that Alice most likely qualifies for the relief being that she was never in the loop of business-related activities giving rise to the tax liability.
Conditions to be met for qualification for Innocent Spouse Relief are:
- The couple must have filed a joint return.
- The tax understatement must be based on the error of the other spouse.
- The requesting spouse must show that he/she was unaware and had no reasonable cause to be aware of the error.
- It would be unjust to hold the innocent spouse liable.
IRS Form 8857 must be submitted within two years of receiving the IRS notice concerning the tax debt in order to void the innocent spouse. However, obtaining any relief is not guaranteed; in 2021, the IRS received more than 26,000 requests for innocent spouse relief-but granted less than 4,800.
IRS collection process and timeline
Before seizing taxpayers’ assets including homes, the IRS involves specified steps by law. The agency must send several notices, including that of Final Notice of Intent to Levy, giving 30 days for taxpayers to work out the debt or request a hearing. While the IRS can get its lien on the property rather quickly, actually forcing a sale on the house usually takes quite a long time; five years or above is the average.
Dave Ramsey said that the IRS might put a lien down “in a heartbeat,” but in this regard, they are “not very competent” when it comes to forced sale collection procedures. He, however, warned that penalties and interest run on, meaning that this $150,000 liability, not put down, would blossom into something like $400,000.
Help in financial and legal terms
Experts have advised against getting the second mortgage to pay the husband’s tax debt. The other option is that, if Alice files for divorce, she should work on making her Innocent Spouse Relief application work, as this would keep the IRS from reaching any of her portion of any jointly-owned property. If the relief is granted and they sell their house, then the IRS could only look to claim money from her husband’s part of the proceeds.
If the couple decides to stay together, they would need to pool their incomes to approach the debt while rebuilding trust. This would include Alice’s nursing income and her husband’s real estate earnings to strategically pay down the debt.
The financial problem of Alice has created discussions about financial infidelity in marriages: a growing problem. Dave Ramsey used the case to speak broadly about wealth and character, suggesting that a really successful person would exude integrity at very fanatic levels. This, in comparison, is the exact opposite of what the husband was doing by running-“a scheme” and looking for shortcuts to wealth. In Ramsey’s view, this is not the type of integrity that would facilitate real financial success.
Read more: What is the difference between Direct Pay and EFTPS?
Read more: What happens if you owe the IRS more than $10,000? What to do next?
