Separation of Liability Relief: Tax Relief for Divorcing Taxpayers

“I’m getting married expecting to get divorced, “ said No one ever! When people get married, they expect to stay together forever. They marry each other and then marry their taxes, even if they don’t exactly marry their finances. Did you know you can divorce your taxes too?

Typically, married couples who file jointly tend to yield the lowest tax liability, compared to filing separately. There are tax credits that are available to taxpayers who file jointly that aren’t accessible if they file separately. Remember though, that when taxpayers file jointly, they are responsible for the tax liability jointly and severally.

What if your soon-to-be ex has created a tax bill that you don’t want to be responsible for? At the same time, you could have a tax bill too. It happens. In these cases, spouses tend to only want to be responsible for their portion of the tax bill. That’s where part 2 of this series takes us: Separation of Liability Relief.
In last week’s blog, we reviewed Innocent Spouse Tax Relief. If you missed it, you can check it out here.

Separation of Liability Relief

Separation of Liability Relief is for taxpayers who are divorced, separated, or no longer living with their spouse for at least 12 months. Under Internal Revenue Code §6015(c), the IRS can divide the understatement of tax on a joint return between you and your former spouse. Instead of being responsible for the full amount (jointly and severally), you would only be responsible for your portion of the bill.

To be clear, this isn’t just a walk in the park. There are specific requirements to be eligible for Separation of Liability Relief.

Separation of Liability Requirements

1. You filed a joint return with your spouse.

2. There’s an understatement of tax due to erroneous items (such as unreported income or improper deductions) attributable to your spouse.

3. You are divorced, legally separated, or have not lived with your spouse for the 12 months before you request relief.

4. You request relief within 2 years from the date of the first collection activity.

There are activities that would preclude you from being eligible for Separation of Liability Relief, such as: Knowing about the understated taxes when you signed the return, or you and your ex fraudulently transferred assets.

Separation of Liability Relief Doesn’t Solve All Problems

Just as it’s important to know that Separation of Liability Relief is available to you, it’s equally important to understand what Separation of Liability Relief WON’T do.

If the tax was reported correctly, and it simply wasn’t paid, Separation of Liability Relief doesn’t apply.
Having actual knowledge of erroneous items on your return will knock you out of the eligibility for Separation of Liability Relief. If you knew and benefited from the underreporting of income, you will not be eligible. Please note that you should not sign a return that you know is incorrect, even if it costs you more in tax!
Interest and penalties will continue to accrue on your allocated portion of the liability.

The key difference between Separation of Liability and the other types of relief is that marital status matters. If you’re still married and living together, Separation of Liability Relief is not an option for you.

Example of Separation of Liability

Mark and Wanda filed a joint return. Wanda had a secret side hustle selling products online. Mark knew nothing about the side business. Wanda failed to report $40,000 in income. The IRS assessed additional tax, interest and penalties of $15,000.

Mark and Wanda divorced. Shortly afterward, they received the letter from the IRS. Mark requested Separation of Liability Relief on Form 8857. Mark was able to prove that he had no knowledge of the unreported income. The IRS agreed with Mark and allocated the tax, penalties and interest to Wanda. Mark is no longer responsible for the debt.

Divorcing is a difficult thing. A tax bill just adds another layer of difficulty. If you’ve found yourself on the hook for a tax bill you didn’t create, schedule a call with us! We are happy to assist you!
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LuSundra Everett, EA is The Home Biz Tax Lady. She is a tax expert located in Chester, VA who will find the right solution for you! As a As an Enrolled Agent licensed through the Internal Revenue Service, LuSundra is authorized to represent taxpayers in all 50 states against the IRS and your state!

Through her work with ETS Tax Relief, she helps high income non-filers and small-business owners face the IRS with confidence, clarity, and a plan.

When you’re dealing with IRS letters, tax debt, or business tax issues, the right representation makes all the difference. At ETS Tax Relief, we work with individuals and business owners across Virginia to resolve tax problems, prevent future issues, and restore peace of mind.

If you’re ready to put your tax troubles behind you, visit http://www.etstaxrelief.com to learn more about how we can help.