When Sarah, a 41-year-old single mother of four from Greenville, opened a notice from the IRS, she was shocked to find nearly $8,000 in unpaid taxes.
The amount was tied to a joint return she filed with her now-ex-husband back in 2018; an amount Sarah thought her ex had paid.
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“I run a really tight budget and I have my debt snowball very planned,” she explained when she called into The Ramsey Show. “I’m wondering if I pivot from that to take care of this tax debt because it had that notice of lien.” (1)
To make matters more complicated, her ex-husband is in jail for embezzlement and, according to Sarah, any payment arrangement he had with the IRS seems to have stopped.
Host Dave Ramsey urged Sarah to investigate because she could qualify for a relief program that she didn’t even know exists.
‘Embezzlement boy is in jail’
The program is called innocent spouse relief and, according to the IRS, it may relieve some taxpayers from additional tax bills when a spouse understated taxes due on a joint return without the other partner’s knowledge. (2)
Sarah earns roughly $130,000 annually and is supporting four children on her own. Ramsey noted that even though the tax debt came from a joint return that was filed when they were married, Sarah may have a chance for this type of relief since she says she didn’t know the taxes were unpaid.
Ramsey suggests that the fact her ex-husband is incarcerated for financial crimes could support her case, saying, “That makes the story even better about you being an innocent spouse. The embezzlement boy is in jail.”
Importantly, Ramsey and co-host Rachel Cruze warned Sarah not to ignore the IRS, and that she should seek professional help to guide her in her situation.
“You do not want these people in your life,” Ramsey said of the IRS. “They have unlimited power, no brains, and they charge all kinds of penalties and interest minute by minute.”
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Who qualifies for innocent spouse relief?
How would someone know if they fit the bill to file for innocent spouse relief? While qualification rules are strict, the IRS (3) could grant relief if a taxpayer can show:
They filed a joint return with their spouse
The taxes were understated due to errors on the return
They didn’t know about the errors
They live in a community property state
The program commonly applies in situations where there was hidden or unreported income, incorrect deductions or incorrect values given for assets.
The IRS also considers personal circumstances, including financial hardship, abuse or whether one spouse controlled household finances. Taxpayers who apply for innocent spouse relief are also automatically considered for other forms of relief including separation of liability relief and equitable relief.
Separation of liability relief may allow divorced, separated or taxpayers who don’t live together anymore to pay only their share of taxes understated on a joint return.
Equitable relief may be available to taxpayers who don’t qualify for other relief options but can show it would be unfair to hold them responsible for taxes their spouse understated or underpaid based on their full circumstances. (4)
For divorced taxpayers facing a similar situation as Sarah, here are some suggestions:
Don’t ignore the IRS
Even if you are convinced the debt belongs to your ex-spouse, penalties and interest continue to grow until the situation is addressed. Missing deadlines can also limit your options so be sure to seek professional advice as soon as you can.
Consult a tax professional
An enrolled agent, CPA or tax attorney can evaluate the situation and provide you with next steps on how to best proceed and what you may be eligible for.
Monitor your finances
Sarah told Ramsey she has been following a debt snowball plan. If Sarah doesn’t get the relief, Ramsey advises that she should prioritize the IRS debt to the very top of any payoff strategy, saying, “It goes to the top of the debt snowball.”
Consider refinancing the balance
Ramsey suggested that if Sarah ultimately remains liable, she may be better off paying the IRS immediately with funds borrowed elsewhere, such as a credit union or credit card, because IRS penalties and interest can escalate quickly.
Keep all official documents
Although divorce settlements don’t shield taxpayers from the IRS, they can still serve as important evidence when applying for relief programs.
In Sarah’s case, whether she qualifies for income spousal relief or not, she walked away with a plan to tackle the IRS debt and more options than she had before she called in for advice. For many divorced taxpayers, that may be the biggest takeaway: even if your name is on a joint return, you may not automatically be stuck with your former spouse’s tax mistakes forever, so it’s best to consult a professional and be sure you are aware of all of your options.
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YouTube (1); Internal Revenue Service (2),(3),(4)
This article originally appeared on Moneywise.com under the title: Dave Ramsey tells a woman hit with $8K in her jailed ex’s IRS tax debt about a relief program she never knew existed
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
