Taxation & Estate Planning

Pre-marital IRS Debt Can Wreak Havoc in Your Financial Life (and Marriage)

By Darrin Mish

Each spouse in a community property state is individually liable for the tax on one-half of the community income, regardless of which spouse actually earns the income, and regardless of whether a joint or separate return is filed. If the parties file a joint return during marriage, their liability is joint and several as to the entire debt, and extends to the community property and the separate property of each. If they file as married filing separately, each must pick up one half of his or her own income and one half of the other's. The potential for havoc is evident if the spouses separate in anticipation of a divorce, especially where one will not disclose income to the other.

If you marry someone that owes the IRS money and you live in or move to one of nine community property states, you may be on the hook for the premarital debt too. The day you get married all income becomes community property which is loosely defined to mean one-half of your income is hers and one-half of her income is yours. If the debt remains unpaid, the IRS can levy one-half your paycheck to pay for the tax bill of your new spouse that accrued prior to your marriage. If you later file a joint income tax return and you are due a refund, the IRS can keep the refund to pay towards the old debt (this will apply regardless of whether or not you live in a community property state).
The only way to protect your money is to make sure your future spouse has filed all their tax returns and paid all their taxes. Run a credit report or search the public records at the county clerk's website for tax liens. Don't be fooled by fancy pre-marital agreements designating your income as separate property. Court rulings have granted the IRS the right to inspect and determine if the agreement has actually been followed. This includes depositing income into separately titled bank accounts and splitting marital household expenses equally. A unemployed spouse for a period during the marriage will allow the IRS to proceed as if the agreement did not exist.

Full post as published by IRS Problem Solver Blog on August 23, 2008 (boomark / email).