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Stop! Protect Yourself from the IRS

© by Greta P. Hicks, CPA

There are many myths, misstatements, and much mis-information circulated about the IRS and income taxes. Opinions on income tax law are discussed at barber shops, hair salons, clubs, restaurants, and on hunting and fishing trips. Much of what is circulated is misleading and tends to create problems rather than solve them.

Your best protection is to be armed with as much reliable information as available. The "BEST DEFENSE IS A GOOD OFFENSE." The more you know about the IRS and your rights, the better you can protect yourself from the dangers of ignorance. Read these real life horror stories and help yourself avoid the cruel, dramatic but realistic myths that catch the unaware.


Myth #1

I am only responsible for one-half of the taxes owed on the joint income tax return that I sign.

STOP! At the time you ELECT to file a joint income tax return and you sign that tax return, you are signing a binding contract that has "joint and several liability." Loosely that means, "If one spouse goes AWOL, the remaining spouse is left to pay 100% of any taxes due."

So you think you are an innocent spouse but do you qualify as an innocent spouse? Probably not! The courts regularly interpret "innocent" and most of the time they have determined that for a person to be innocent, they must:

  • Not have benefited from the income reported or unreported on the income tax return.
  • Not have had a reason to believe that there was an error on the income tax return.
  • Before signing the income tax return, ask questions about items on the tax return.
  • "An ounce of prevention" is the best policy. Here are some helpful hints:
    • NEVER, NEVER, NEVER sign any document, including an income tax return unless you understand its contents and the risk you are accepting.
    • Signing a joint income tax return is an election. Make sure it is in your best financial interest to sign a joint income tax return.
    • Consider a "married filing separate" tax return. The tax bracket is higher, but it will help to limit your liability to the amount on your tax return and not 100% of the tax on a joint return.


Myth #2

If I marry someone who owes the IRS money, that is a separate property debt and I do not have to pay it.

STOP! If you live in or move to one of nine community property states. The day you get married all income becomes community property income which is loosely defined to mean one-half of your income is hers and one-half of her income is yours. If the debt remains unpaid, the IRS can levy (take) one-half your paycheck to pay for the old separate property tax bill. Or, if you later file a joint income tax return and you are due a refund, the IRS can keep the refund to pay towards the old debt.

You can protect your money by a "buyer be aware" attitude.

  • Before marriage, make sure all income tax returns are filed and paid.
  • Have a credit check run or go to the court house and do a lien search to see if the IRS has filed any tax liens.
  • A pre-marital agreement designating your income as separate income does not fully protect you but it is better than nothing. You'll need to contact an attorney to discuss further this protective measure.


Myth #3

When I get a divorce, I can protect myself by having in the decree that any income taxes owed are the responsibility of my ex-spouse.

STOP! A divorce decree is a contract between two individuals and a federal income tax return overrides any statements in a divorce decree. The IRS does not honor divorce contracts! If there are unpaid taxes, the IRS GOES AFTER the person easiest to find and/or the one who has the most money. The divorce contract does give you recourse against the ex-spouse. Contact your attorney for recourse against your ex-spouse.

Helpful hints:

  • Require that all income tax returns be filed and paid prior to the divorce becoming final.
  • Consider filing a "married filing separately" tax return for the final year(s) of a dissolving marriage.
  • Discuss with your attorney the wording of the "tax" clause in your divorce decree.


Myth #4

Because corporations have limited liability I cannot be responsible for a corporations debt(s).

STOP! Under Internal Revenue Code 6672, when a corporation fails to pay its payroll taxes, the "responsible party" is personally assessed the trust fund portion of these taxes. Loosely, a responsible party is a person who is in the position, has the duty and responsibility, and does not assure that the payroll taxes are paid. Most often, it is a person who can sign on any one of the corporate bank accounts.

You can protect yourself from this problem, by following these precautionary steps.

  1. Do not have the authority to sign on the bank account or withdraw as soon as you discover the taxes are not being paid.
  2. When a corporation is first organized, the minutes can reflect the officer responsible for the administrative and financial duties and make sure you aren't that officer.
  3. Consider resigning as corporate officer or employee when you discover unpaid payroll taxes.
  4. As soon as you know the IRS is attempting to designate you a "responsible party," meet with the IRS and complete Form 4180, Report of Interview with Individual Relative to 100-Percent Penalty Recommendation.
  5. Keep a diary. Make every attempt to document that you had neither the authority, duty or responsibility to pay over the payroll taxes.

There are appeal rights but it is better to attend to the potential problem early rather than have MYTH #4 occur.


Bottom Line

Whenever you are faced with a MYTH, check it out! Ask questions of your tax advisor or the IRS. Read IRS and commercial publications. Be an informed taxpayer so that you can protect yourself from accidentally getting into trouble with the IRS. You, with the help of your tax advisor, are your best defense against getting trapped by myth, mis-information, and more.


Horror Story #1

Rob and Sara got married. Rob got a notice of an IRS audit on a tax year that he and Samatha, his first wife, filed. Rob can't get the records from Samatha. Since Rob does not have records, the IRS disallows all the deductions and sends Rob a bill for $5,000. Rob and Sara filed joint tax returns but Sara wants nothing to do with this problem. She doesn't think she has a problem. Who will the IRS contact to collect the money? The person easier to find. The person with the most money. Will they collect 50% from Rob and 50% from Samatha? Probably not. They do not get into marital problems and will leave it to Rob and Samatha to negotiate with each other. Most likely either Rob or Samatha will have to pay 100% of the taxes. Or, if neither of them pay the tax bill and Rob and Sara live in a community property state, the IRS could take half of Sara's paycheck for as long as she and Rob are married.


Horror Story #2

Dick and Jane got a divorce and Jane got the house. Jane marries Harry. Some years later they discover a card on their door that says "Call me, I work for the IRS." To their surprise and shock, they learn that she owes taxes because she was the treasurer of Dick's corporation and the corporation did not pay their payroll taxes. The IRS has determined that she and Dick are responsible parties and now the IRS wants to take the house she got in the divorce to pay for taxes they say are owed. Can she lose the house? Possibly. The IRS can take homesteads. They usually don't but they can. Can she get out of the taxes? Possibly, if she can prove she did not take an active part in the corporation and had no check signing authority. OR, if they live in a community property state the IRS can take half of HARRY'S paycheck!

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GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing educational materials and programs on solutions to IRS problems and is a nationally known speaker and writer on solutions to IRS problems. To arrange for consultation contact: Greta's web site: http://www.gretahicks.com

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