Joint Tax Returns May Not Be All They’re Cracked Up to Be

Husband and Wife are divorcing.

They file their last joint tax return together. After years of filing joint tax returns.

Husband’s accountant always prepares the joint tax returns. And Wife always dutifully signs.

Husband and Wife go their separate ways, with no further contact between them.

The IRS takes a second look at one of their joint tax returns. And concludes that “the couple” has underreported their income.

Husband is nowhere to be found. So the IRS comes after Wife, who is barely getting by.

I’ve lost count of how many times non-clients have contacted me with a variation of this theme.

Under federal law, spouses who file joint tax returns are jointly liable. That means that each spouse is equally responsible for the entire joint tax liability.

This allows the IRS to pursue the full amount the couple owes from whichever spouse is an easier target.

This can result in harsh and unfair outcomes to a spouse earning less or nothing, who had no say in the other spouse’s reporting decisions, no access to underlying income information and no real choice but to sign the joint tax return presented.

The law does offer protection to some spouses in limited circumstances under the so-called innocent spouse rule . But it isn’t so easy to qualify for this protection.

Under the innocent spouse rule,

  1. an innocent spouse hasn’t benefited from or enjoyed the unreported income

  2. an innocent spouse doesn’t know or have reason to know about the improper income reporting and

  3. it would be inequitable to hold an innocent spouse liable.

If you know or suspect funny business by your spouse, in addition to seeking protection in any divorce settlement you may enter, it may also be prudent to simply file taxes separately.

Read more in this BST article: Joint Returns: Spouses Are Guilty Until Proven Innocent.