This is the fourth article in a four part series addressing frequently asked questions relating to protection from joint and several liability in divorce. We are often asked about the language that a taxpayer’s attorney should include in the divorce decree to protect the taxpayer from joint and several tax liability. This series is intended to provide taxpayers and practitioners with answers to the most commonly asked questions relating to drafting a divorce decree to provide protection from joint and several liability in divorce. Other posts in this series can be found here, here, and here.
Ensure that Your Client has Filed their Tax Returns and Paid Down their Tax Liabilities to the Extent Possible
Taxpayer compliance is essential. Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment and usually cannot be abated. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Taxpayers who do not pay their taxes on time also generally face a failure to pay penalty of ½ percent of their unpaid taxes, which begins accruing the day after the tax filing due date and is applied for each month or part of a month after the due date. The failure to pay penalty caps at 25 percent. The penalty for late filing is normally 5 percent of the unpaid taxes each month or part of a month that a return is late. The failure to file penalty caps at 25 percent. If the failure to pay and failure to file penalties accrue simultaneously, the concurrent penalty caps at 22.5 percent.
For these reasons, it is important to advise your client to make sure that all of their joint and individual tax returns are filed and that their tax liabilities are paid to the extent possible, even if the client is unable to pay the taxes due in full. Filing all returns and making an effort to pay down the tax liabilities will help limit the penalties and interest. The IRS looks favorably on taxpayers who attempt to be compliant. This will be helpful if your client later requests innocent spouse relief or a payment arrangement with the IRS. When drafting a proposed divorce decree, be sure that allocation of the unpaid joint tax obligation includes “tax, penalties, and interest.”
Address Your Client’s Recourse Should the Responsible Spouse Not Pay the Joint and Several Tax Obligation
The proposed decree should also include language regarding the non-responsible spouse’s recourse should the responsible spouse not pay the tax obligation. Recourse could include specific collateral that the responsible spouse must surrender to the non-responsible spouse in the event the responsible spouse does not pay the tax obligation or indemnification of any funds the non-responsible spouse pays to the IRS toward the joint obligation. Recourse could also include indemnification of attorney and legal fees the non-responsible spouse incurs defending against IRS’s pursuit of the funds or payment of attorney and legal fees for the non-responsible spouse’s application for innocent spouse relief.
Taxpayers can protect themselves from IRS enforced collection action by obtaining relief from joint and several liability for their joint tax obligations with their former spouse. This relief can only be granted by the IRS, not the family court judge. Even though the language in a divorce decree cannot stop the IRS from collecting from either or both ex-spouses, the language in the decree matters. How the decree allocates the joint tax obligation is one of the factors the IRS considers when determining whether to grant a taxpayer innocent spouse relief. Additionally, the attorney can draft the proposed decree to preemptively address the elements that must be present for the IRS to grant the taxpayer relief from the joint obligation and flesh out the facts that weigh in their client’s favor. Effective drafting of the divorce decree can help ensure the success of your client’s request for relief from joint and several liability.