There are many ways to show your love for your spouse. But the one way that really stands out (in a bad way) is to give your spouse an IRS tax debt.
When a married couple has unfiled tax returns they often go to a tax preparer or CPA to have the tax returns prepared. The CPA or tax preparer, in an attempt “help” the married couple, will oftentimes recommend that the couple file their tax returns jointly so that they can lessen the tax liability for each year, thus lowering their tax liability and saving them some money.
This happens all the time. A true story – last month I spoke with a very intelligent CPA who had decades of experience about this very issue. He had no clue that this was a pitfall to avoid. I told him that he would be committing malpractice if he didn’t carefully evaluate this issue before filing the tax returns.
While filing jointly and lowering your tax debt may appear to always be a great idea, it can potentially be a horrible idea that has unexpected ramifications.
It’s true that the couple will likely be able to reduce their tax liability by filing jointly, they also make each spouse jointly and severally liable for each year’s tax debt that they file jointly on. The term “jointly and severally liable” means that the IRS can collect against either spouse for the entire amount of the tax debt. The IRS can go after only one spouse if they want to and completly ignore the other spouse.
The IRS can garnish either spouse’s sources of income, for example, their wages or retirement income. The IRS can also levy or garnish their bank accounts and 401(k)’s.
While filing jointly may be the best decision to make in some instances, it is a decision that should be made with thorough consideration of the ramification of that decision.
For example, if one of the two spouses is the one who owes all the tax, it may be best to have them file separately. Even though it may make their tax liability larger, it ensures that the other spouse’s income is not subject to garnishment by the IRS. This is a huge issue.
Most of the time the spouse that doesn’t owe any, or much, back tax is not too happy with their spouse for owing taxes. It makes the “innocent spouse” rather unhappy to even have to deal with the tax debt, much less be a collection target of the IRS. For the peace of the marriage, its best to not have that spouse be an IRS target.
Unfortunately I’ve seen many marriages split up over the issue of tax debt. It is a great way to decrease the stress level around the dinner table at night if the “innocent spouse” is free from the fear of being an IRS collection target. You can think of the increased tax debt caused by filing separately as a sort of gift to your innocent, or less innocent, spouse.
There are a few other advantages to filing separately, but I’ll discuss that another day.
Until next time,
Jeff Fouts
