Your Spouse Owes the IRS. Is Your Inheritance Protected?

A couple has not filed in six years. The wife's design firm has struggled, and she owes the IRS more than she can realistically pay. Her husband inherited a mortgage-free home and holds a substantial IRA. Their accountant has joint returns ready to file, but if the husband signs, everything he owns may be used to pay his wife's tax.

A hypothetical, for illustration only.

A Joint Return Puts Both Spouses' Assets in Play

A joint return makes each spouse liable for the entire tax on it (IRC Section 6013(d)(3)). This means the IRS can collect from either spouse.

In our example, the couple's joint return could result in the husband having…

• A federal tax lien on his inherited home, clouding title for any sale or refinancing.

• A levy on his IRA, forcing a distribution that is itself taxable income.

• A suit by the Department of Justice to enforce the lien and force a sale of the home.

Separate Returns Can Protect Your Assets

If a married couple files individual tax returns, the liability stays with the spouse whose income created it. Individual returns could, depending on the circumstances, be changed to a joint return at a later date (see our post on filing jointly) . However, a joint return can be hard to undo, so it's crucial that you make the right decision for your assets before you sign.

In our example, the husband's decision could be the difference between keeping his inheritance and using it to pay his wife's tax.

Separate Filing Changes Your Options

Separate filing could help both spouses. When the IRS evaluates an offer in compromise, it measures what it could reasonably collect: equity in the taxpayer's assets, plus future income. On a joint return, both spouses are liable, but with separate filings, each person's assets and income are measured individually, which can make a resolution far more achievable.

Where the Exceptions Lie

Protecting assets with separate filings is only effective if an asset genuinely belongs to one spouse. Transferring an asset's ownership to keep it from the IRS can be challenged. Additionally, in community property states (including Texas and California), community property can often be reached for either spouse's tax debt, and separate returns must still divide community income. In those states the analysis changes, though inherited property is generally treated as separate property unless it has been commingled.

Before You Sign the Draft Returns

Don't sign yet. Have counsel review the draft returns first, especially if:

• One spouse holds significant inherited or separate assets.

• A spouse has a balance that cannot realistically be paid.

• You live in a community property state.

Frequently Asked Questions

Have Your Draft Returns Reviewed Confidentially

Nyar Tax advises business owners, executives, and high-net-worth individuals on joint liability, IRS collection, and complex tax controversies, including tax analysis in high-net-worth divorce.

Daylan A. Nyarko handles federal tax matters nationwide from the firm's Austin office. If draft returns are waiting for a signature, request a confidential assessment before anything is filed, or call 1.888.995.2015.