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Taxing problems in New York divorce settlements

Tax time is unpleasant. Even refunds are depressing when taxpayers realize the check they get back is money they should never have paid. Most New York residents have at least some idea of an expected federal tax liability before the Internal Revenue Service deadline rolls around. The exception may be spouses in the middle of a divorce.

One of the nastier tricks unhappy spouses play is failing to pay tax bills. The divorcing spouse may know their partner can be held liable for back taxes, penalties and interest for a jointly-filed return. Surprise tax bills can show up during divorce negotiations or, worse, after the decree.

A settlement may say that one spouse holds complete responsibility for past unpaid taxes. That provision does not deter the IRS from collecting what it is due when both spouses' signatures share one 1040 form.

A joint filing equals joint liability, unless a spouse can prove "innocence" of the tax burden. The IRS accepts appeals for "innocent spouse relief," although legal advisers say the government is not easily convinced a taxpayer is qualified.

Manipulation of finances is not as uncommon as many spouses believe. Hidden assets and underreported debt send shockwaves through stunned spouses, especially partners who pay scant attention to marital finances. Lawyers and financial consultants recommend that all spouses stay informed about marriage money, from income shifts and investments to total debt.

Accountants often encourage married couples to file jointly because benefits are greater than filing separately. The downside is joint responsibility. A tax indemnification agreement can shield you from liability for a spouse's underreported income, but the IRS bill will still arrive in two names.

Tax and legal consultants can prevent a spouse from making unhealthy tax commitments. Before signing a joint return, have a professional review forms and documentation thoroughly. Immediate benefits might be lost by filing separately but could avoid tax hardships in the long run.

Source: nydailynews.com, "One more reason to hate your ex: you could get hit with his or her tax bill," Phyllis Furman, April 5, 2013

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