Should She Marry Him?

A frequently asked question from female clients is, "My boyfriend has tax problems and he has askedme to marry him. Should I?" The standard answer is, "Tell him yes, but only after his tax problemsare resolved." Once married, his tax problem may become your tax problem.

No, this is not a personal advice column, but this a common, and serious, potential tax problem.First, remember that we are in a community property state. Second, the Internal Revenue Service(IRS) follows the income and property laws where the taxpayers are located.

Because of certain tax benefits married filing jointly (MFJ) allows, many married taxpayers choose tofile a joint tax return. If MFJ is elected, "both taxpayers are jointly and individually responsible forthe tax and any interest or penalty due on the joint return even if they later divorce. This is true evenif a divorce decree states that a former spouse will be responsible for any amounts due on previouslyfiled joint returns. One spouse may be held responsible for all the tax due."

Facts from a recent phone call: Jean is a teacher with two children and owns her home. All herincome taxes have been currently filed and fully paid. Her boyfriend, Joe, owes back taxes. When heasked her to marry him, she said "Yes." What are the possibilities regarding the taxes and what arepotential solutions?

Prenuptial agreement. Consult with an attorney to discuss the possibility of her income being herincome and her house remaining her house. A prenuptial is not a cure-all, but it is better than noagreement.

Suppose they file a joint tax return, and the IRS keeps their refund and applies it to his back taxes.What are her remedies? Rev. Rul. 2004-74 provides guidance under Internal Revenue Code (IRC)6402 "regarding the amount of an overpayment from a joint tax return that the IRS may offset

against a spouse's separate tax liability for taxpayers domiciled in Texas." Three different factsituations as discussed and the solution is determined by which spouse made tax payments andwhich spouse incurred liability. She can file a Form 8379, Injured Spouse Allocation. The IRS willuse a formula discussed in Rev. Rul. 2004-74 to determine which part of the refund is hers andrefund that amount to her. When filing a Form 8379 "with a joint tax return or amended joint taxreturn, enter 'Injured Spouse' (preferable in red) in the upper left corner of page 1 of the jointreturn." IRS Tax Tip 2011-60, Revenue Ruling 74-611, Rev. Rul. 85-70, Publication 555 atwww.irs.gov and the Financial Management Services, www.fms.treas.gov, provide additionalinformation regarding application of income tax laws in a community property state. If Form 8379 isnot timely processed, call the Treasury Offset Program Call Center at 800-304-3107.

Maybe the remedy is to file a married filing separately (MFS) income tax return. Humm? First, theMFS tax bracket is higher, which results in more taxes than filing as MFJ. Also, in a communityproperty state (without a prenuptial agreement), the income of both individuals is added togetherand divided in half. The good news is each will owe income taxes on one-half of their communityincome under the MFS rates. See Publication 555 for details of allocating community income. On aMFS tax return, one-half of his self-employment income is on her tax return, which results in herowing taxes on one-half of his income; however, one-half is better than being responsible for 100percent of taxes owed on a MFJ tax return. The good news is that on a MFS return, she does not oweany self-employment taxes on the one-half of his self-employment income reported on her return.

Suppose the IRS decides to levy her paycheck. IRM 5.11.6.12: "In community property states,taxpayers who are liable for delinquent tax have a community property interest in their spouse'sproperty and rights to property. In this case, the delinquent taxpayers' property rights in theirspouses' property and rights to property might be subject to levy." See references in 2 above andInternal Revenue Manual (IRM) references.

Let's say a federal tax lien is filed and it is attached to her house. What then? She can attempt tokeep her house as separate property by not allowing him to make payments on the house or by notmaking payments on the house from community funds and/or joint bank accounts. She will need toprove funds have not been co-mingled and refute the underlying tax liability.

After filing a MFJ income tax return, the couple decides to get a divorce. If they owe taxes on thejoint income tax return, either one of them can file a Form 8857, Request for Innocent Spouse Relief.Form 8857 covers three types of relief: innocent spouse relief, relief by separation of liability andequitable relief. When requesting relief based on community property laws, Form 8857 must be"filed no later than six months before the expiration of the period of limitations on assessment(including extensions)" against the nonrequesting spouse or former spouse for the tax year for whichthe innocent spouse is requesting relief. For additional information on innocent spouse relief, seeIRS News Release IR-2011-80 and Notice 2011-70.

Generally, community property laws require taxpayers to allocate community income and expensesequally between both spouses. However, community property laws are not taken into account indetermining whether an item belongs to the innocent or nonrequesting spouse (or former spouse)for purposes of requesting any relief from liability.

Per Rev. Proc. 2003-19, the nonrequesting spouse has the right to appeal the preliminarydetermination to grant partial or full relief to the requesting spouse when the preliminarydetermination letter is issued April 1, 2003, or later. However, the nonrequesting spouse may notpetition the Tax Court from the final determination letter. If relief is denied in part or in full, and therequesting spouse petitions the U.S. Tax Court, the nonrequesting spouse, by law, will be given the

opportunity to become a party in that proceeding.

The answer remains, "Clear up the tax problems before marriage."

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