Marriage presents a number of difficult tax questions. One question is whether both spouses can be held liable when they file separately and one spouse fails to pay their taxes. This is a common marriage tax question that we are asked.
One might think that the married filing separate status fully protects the other spouse. The Long v. United States, Case No. 2:22-cv-00176-JCB (Dist. UT 2022), shows why this is not the case in some circumstances.
Facts & Procedural History
This case involves a married couple. The couple filed separate tax returns during the marriage. The husband failed to pay his income taxes during the term of the marriage. The IRS eventually filed a notice of its tax lien against the husband.
The lien notice impacted real estate the taxpayers owned together as joint tenants.
The wife was awarded the property as part of their divorce. After the divorce, she then asked the IRS to remove its lien notice from the property. The IRS refused and the wife sued the IRS to quiet title under 28 U.S.C. § 2410.
The question for the court was whether the IRS can be forced to remove an IRS lien given this fact pattern.
About the IRS Lien
To understand the answer, we have to start with the general rules about IRS tax liens.
An IRS tax lien arises by operation of law automatically when a tax is due and not paid. It attaches to all property owned by the taxpayer. This includes property that is jointly owned.
The IRS tax lien can be a secret lien if the IRS does not file its notice of the tax lien in the public records. Until the IRS files its lien notice, there is a possibility that a third party who pays fair market value for the property can acquire clear title to the property. This bonafide purchaser exception is why the IRS files lien notices. By filing the notice, the IRS puts the public on notice of the lien and, consequently, the bonafide purchaser exception no longer applies.
There are nuances, but these are the general rules.
The IRS Has the Discretion to Remove IRS Liens
This brings us back to this case.
The taxpayer-wife asked the IRS to withdraw its lien notice. Presumably, the taxpayer-wife believed that the family law court’s award of the property to her was determinative. Or perhaps she believed that the IRS should be limited to the husband’s assets given that this was his debt. These are common misconceptions that we often hear.
Federal tax law is not limited by state tax law when it comes to collections. While state law can create property interests to which Federal tax liens attach, Federal law does not look to state law to determine whether a transfer of the property impacts the IRS’s ability to collect back taxes from the property owner.
That is exactly what the court held in this case:
Because the Tax Liens attached, 26 U.S.C. § 6322 provides that they cannot automatically “detach” from the Property unless: (1) the federal tax liability is satisfied; or (2) the lien “becomes unenforceable by reason of lapse of time.”7 Ms. Long also concedes that neither condition has occurred to cause the liens to “detach” from the Property.
The taxpayer-wife also cited I.R.C. § 6325(b)(2)(B) which allows the IRS to discharge a lien on property that is worthless. The court noted that this provision is discretionary. The very language of the Code says so. The court concluded that it could not order the IRS to exercise its discretion to remove the lien under this Code section.
Other Remedies for Jointly Held Property
There is nothing surprising about the court’s holding in this case.
This case highlights that suing the IRS to enforce a discretionary provision like this one is usually not going to be successful. One has to pick their remedy and, with taxes, there are often a number of options.
For example, another remedy might have been for the wife to pay down the balance and have the husband enter into a direct debit installment agreement, and then follow the process to ask the IRS to lift the lien notice. The wife would have to get her ex-husband to agree to this and he would have to meet the requirements for this remedy to apply. If those factors are met, this could help the wife get clear title to the property and the property could be sold (if that is what the wife wanted to do).
If the parties were able and willing to work together, they might be able to get the family court to enter a declaratory judgment saying that the property was actually the wife’s separate property. Some states have laws that even provide for correction deeds to make retroactive changes like this without involving the court. If the property was separate property retroactive back to before the time the IRS lien notice was filed or the taxes were even due, it is less clear that the IRS lien ever attached to the property in the first place. This might provide another remedy.
Another remedy could be innocent spouse relief. This remedy can get rid of a joint income tax liability. The taxpayers did not file jointly in this case. Moreover, even if granted, innocent spouse relief probably would not help with the IRS lien notice.
Another remedy might be to go back to the family law court that awarded the property to the wife. In many states, such as Texas, the family law court retains jurisdiction over these types of issues. If the divorce decree or settlement agreement included language that deals with this issue (which most do), this could provide a viable remedy. With this remedy, the family court might be able to enter an order that requires the taxpayer-husband to make arrangements to pay the back taxes or even award other property to the taxpayer-wife to compensate her for her loss.
A similar remedy, which might be riskier, could be for the taxpayer-wife to pay off the back taxes and then sue the ex-husband to recover the taxes. A similar option is to go through with the sale and have the proceeds applied to pay off the back taxes and then sue the ex-husband to recover the loss. This could only have a chance of working if the ex-husband has other assets the wife can get and the state law allows for such a suit.
This court case helps clarify that spouses can be liable for taxes incurred during the marriage even when they file as married filing seperately.
It also helps explain the options that may be available in a later divorce proceeding in this situtation. Any jointly held property might be sold to a bonafide purchaser for full fair market value prior to the time the IRS flies its lien notice. If the lien notice is already filed, the divorce decree and/or settlement agreement should include language saying how this is to be handled or the spouse may have to pay the balance or make arrangements to satisfy the lien and then look to the ex-spouse for compensation.