In Tax Court Memo 2017-144, the Tax Court denied relief to a spouse where the Court held that she knew, or had reason to know, that her husband’s tax liabilities would not be paid.
In this case Dr. Ryke, a medical doctor with little financial experience, first discovered her husband’s history of tax problems before they were married. As a result the Rykes maintained separate credit cards and Dr. Ryke put the home mortgage in her name only.
The Rykes filed joint tax returns for eight years. Mr. Ryke, a self-employed attorney, handled the family’s joint tax returns and Mrs. Ryke signed them. She did not examine the tax returns before she signed.
Married taxpayers who file a joint federal income tax return are jointly and severally liable for the tax reported or reportable on the tax return.
Every year the Rykes owed money but failed to pay the balance. Dr. Ryke thought that her husband was paying their taxes when he was filing their joint tax returns. She was surprised when she found out that he wasn’t. At her husband’s request she made a payment of over $50,000 to satisfy the debts, and later requested relief under the Innocent Spouse rules so that she might recover the portion of the tax debts attributable to her husband’s business.
The Tax Court ruled that Dr. Ryke either knew, or had reason to know that the liabilities shown on the returns would not be paid. The Court also found that she had actual knowledge of outstanding tax liabilities, (versus mere knowledge). Since she signed the returns, she was jointly and severally liable for the entire debt, not just her portion.
If your spouse is bad with money, you should consult a licensed tax practitioner before signing any joint tax return because your circumstances may warrant filing separately. In this case the Rykes were still married at the time of the Court’s Memo, but in most of these cases involve divorce; the claim of Innocent Spouse usually comes after the divorce, but can also be a factor contributing to divorce.