What If One Spouse Owes Taxes But the Other Spouse Doesn’t?
Here at Choice Tax Relief we have a lot of clients that racked up a significant amount of tax debt before they got married. Now that the client is married they are solely responsible for that tax debt and their spouse is not.
We also have clientele who incurred tax debt while they were married, but have always filed separately from their spouse to separate their spouse from any accountability of said client’s tax debt.
The bottom line is if one spouse owes taxes but the other spouse doesn’t, the IRS usually can’t go after the non-liable spouse’s income and assets, but the non-liable spouse’s income and assets can nevertheless still affect the liable spouse’s resolution with the government of their tax debt.
These scenarios create the dynamic of a non-liable spouse. A non-liable spouse is a spouse who is married to somebody that has tax debt, but the non-liable spouse does not have tax debt.
Offer in Compromise Considerations
However, if the liable spouse in a marriage pursues an offer in compromise with the IRS, the income and assets of the non-liable spouse may still affect their offer in compromise paperwork and offer amount.
Here are some things to keep in mind if you plan on submitting on offer in compromise to settle tax debt that you owe but your spouse does not.
#1: Do you have to include a non-liable spouse on the Form 656?
No, you do not have to include a non-liable spouse on Form 656.
Form 656 is the actual offer/contract that one will sign and submit in hopes that the IRS will agree to new terms of reducing one’s tax debt.
If your spouse is not liable for the debt, then the offer is not being made on behalf of the spouse, and so their name would not go on the Form 656.
You’ll notice that Section 1 of the Form 656 only requires your spouse’s name to be included if the offer is a joint offer, meaning that both you and your spouse owe the tax debt.
However, if your spouse is not liable for the tax debt, their name would not be listed on the Form 656.
#2: Do you have to include your spouse’s name in Section 1 of the Form 433-A (OIC)?
Yes, you have to include your spouse’s name in Section 1 of the Form 433-A (OIC) if you live with them.
The Form 433-A (OIC) is a form on which you provide financial information about yourself and your household to the IRS.
If you live with your spouse, they are then part of your household and would generally be named in Section 1 of the Form 433-A (OIC), even if they are not liable for the taxes.
#3: Should I include my non-liable spouse’s income in Section 7 of the Form 433-A (OIC)?
You should not include your non-liable spouse’s income in Section 7 of the Form 433-A (OIC).
According to Internal Revenue Manual Section 5.8.5.24, the assets and income of a non-liable person are excluded from the computation of the liable taxpayer’s ability to pay.
And since your spouse is a non-liable person, their income should be excluded from the Form 433-A (OIC), which is essentially your computation of your ability to pay your taxes for offer in compromise purposes.
#4: Does a non-liable spouse affect my calculation of household expenses in Section 7 of the Form 433-A (OIC)?
Yes, a non-liable spouse affects your calculation of household expenses in Section 7 of the Form 433-A (OIC).
For one thing, your spouse is a member of your household, and so increases the standard amounts for several expense categories.
For another, the IRS will likely require you to allocate your household expenses between yourself and your spouse unless you can show very clearly that you pay for such-and-such expenses and your spouse pays for other expenses and that this has been a long-standing arrangement that was not contrived simply to optimize your situation for IRS collections purposes.
However, a non-liable spouse’s income may affect your household expenses according to Form 433-A (OIC), Section 7. There is generally a bifurcation of the household expenses if you have two spouses contributing to those expenses. If your mortgage doesn’t exceed the standard for housing for your area and your family size, then put the entire housing expense on line 40 because there is a non-liable spouse.
We know that the offer examiner/offer specialist is going to do this anyway. The IRS offer examiner/offer specialist should secure sufficient information concerning the non-liable spouse’s assets and income. This will be used to determine the taxpayers proportionate share of the total household income and expenses by reviewing the entire household’s information.
We typically can’t get away with not prorating shared household expenses based on the house’s respective share of income or if they have a long-standing agreement about how the spouses are sharing expenses.
#5: What if we live in a community property state?
Issues can arise in terms of community property states. IRS Section 5.8.5.24 states the following: “Exception: Community property states. Follow community property laws in these states to determine what assets and income of the non-liable person are subject to the collection of tax. See IRM 25.18.4, Collection of Taxes in Community Property States and IRM 5.8.5.5, Jointly Held Assets. / Exception: Domestic partnership states. Follow domestic partnership laws in these states to determine what assets and income of the non-liable person are subject to the collection of tax.”
At Choice Tax Relief it is our policy to make the IRS make the argument to us that we need to include the spouse’s information. It is the IRS’ responsibility to take notice that it is a community property state and tell us that the spouse’s information needs to be included because it is such.
#6: What if my tax debt is joint with an ex-spouse?
It is possible to share joint tax debt with an ex-spouse if, prior to your divorce, you filed tax returns jf, prior to your divorce, you filed jointly with your (now) ex-spouse,Prior to divorce, they filed jointly, but now one of the spouses is looking to file an Offer in Compromise.
The ex spouse could submit an offer for the liability to be separated and the request to be that the IRS mirrors said liability. This takes it from a joint collections case into two separate collection cases. One ex spouse can submit an Offer in Compromise to settle the debt themselves and in that case, they would not put their ex spouse on Form 433-A (OIC).
Author:
Logan Allec, CPA, Founder and Owner
Logan Allec has been serving taxpayers as a CPA for over 14 years. After leaving his role at a "Big 4" firm, he started Choice Tax Relief to help everyday Americans who have found themselves behind on their taxes. He also educates thousands of people daily about tax relief on his YouTube channel. In addition to his CPA license, Logan also has a Master's Degree in Taxation from the University of Southern California (USC). He lives with his wife and children in the Los Angeles area. Learn more about Logan here.
