Divorce can be a financially difficult time for a separating couple. In addition to the costs of divorce lawyers and litigation, each spouse will likely deal with changes in assets and debt, property changes, and relocation. To make the divorce even more painful, a spouse may get a tax notice in the mail informing them about penalties and interests for unreported taxes from prior years which the spouse knew nothing about.
When a couple files as married filing jointly, each spouse may be liable for any tax bills, interest, and penalties. Even after the couple separates, each signatory to the tax filing may be liable as long as they fall under the statute of limitations. However, there may be some relief for a spouse who was not aware of any tax errors at the time of filing. If you have questions about your tax liability for late filings or penalties after a divorce, contact your reliable tax attorney in Maryland.
Tax Year Individual and Married Filings in Divorce
A divorcing couple can generally choose their tax filing status based on marital status on the last day of the tax year. This means that a couple who divorces at any time between January 1st and December 31st would be considered unmarried for that tax year. You are unmarried if you have obtained a final decree of divorce by the last day of your tax year.
For example, if you and your spouse are legally divorced on December 30th of 2019, you and your spouse have to individually file taxes as unmarried for tax year 2019. However, if the couple waited 2 more days until January 1st, 2020 before the divorce was finalized, the couple could elect to file as married filing jointly or separately for tax year 2019.
Liability for Unknown Tax Errors
The Internal Revenue Service (IRS) provides for “innocent spouse relief,” where a spouse should not be penalized for the errors made by their spouse. However, the burden is generally on the spouse to show that they qualify for innocent spouse relief. Innocent spouse relief often applies after a couple becomes divorced or separated, when the spouse first learns about tax problems that the other spouse did not disclose or tried to hide.
In order to qualify as an innocent spouse, you must be able to satisfy all of the following requirements:
- You filed a joint tax return that contained an error that is “solely attributable” to your spouse. This error could be in relation to reported income, deductions, tax credits, and/or improperly reported basis of property.
- You must assert that you were not (and could not have been) aware of the error at the time the tax return was filed.
- You must prove that it would be unfair to hold you responsible for your spouse's error and resulting tax, penalties, and interest.
Additionally, a spouse may not be eligible if the spouses (or former spouses) transferred property to one another as part of a fraudulent scheme. This includes a fraudulent scheme to defraud the IRS, creditors, ex-spouses, or business partners.
Tax Issues After a Divorce in Maryland?
If you are learning about tax issues, penalties, and interest after a divorce, talk to your Maryland tax attorney for help. Contact Gabaie & Associates, LLC for a free consultation on your state or federal tax issue at (410) 862-2198.