The two most common questions asked when someone files a tax return are how much of a refund will I get or how much am I going to owe.
In the case of a married couple filing a joint tax return, typically everything is shared. So, the refund a married couple gets back or the amount they owe is due to both of their incomes, deductions, credits, etc.
But, a debt that was incurred before a marriage by either of the spouses can also cause a refund to be kept and applied to that debt.
Injured spouse relief may be a way for you to keep that refund or at least your portion of it.
WHO IS AN INJURED SPOUSE?
An injured spouse is a taxpayer whose refund or portion of a refund as shown on a jointly filed return is being kept and applied to their spouse’s debts that were incurred before they were married.
Common Debts Are:
- Past Federal or State Liabilities
- Child or Spousal Support
- Federal Student Loans
Generally, a refund being applied to a debt that was incurred by either spouse while married does not qualify the other spouse as an injured spouse, due to the fact that the debt incurred while married is seen as jointly owed.
WHY IS THE IRS ABLE TO OFFSET THE REFUND?
According to the Code of Federal Regulations (“CFR”) 30.24 the IRS holds taxpayers who file a married filing joint return jointly and severally liable for a tax debt that is incurred.
This also means that any refund that comes about from the filing of a joint tax return is able to be applied to a debt of either spouse, whether it was incurred before the marriage or during the marriage. As seen in Internal Revenue Code (“IRC”) § 6402, the IRS does not allocate how much of the refund is attributed to each spouse’s income, deductions, credits, etc. and therefore the entire refund becomes fair game to be applied to the debt.
HOW DOES INJURED SPOUSE RELIEF WORK?
Injured spouse relief works in a fairly simple way if you’re not in a community property state.
- It starts with filing Form 8379, Injured Spouse Allocation Form where you will allocate yours and your spouse’s wages, self-employment income, expenses, deductions, credits, etc.
- Certain commingled assets like interest on a joint bank account would be divided equally.
- The IRS will then use the allocations to determine how much of a refund you would have been due and how much of a refund your spouse would have been due (similar to if you had filed separate returns).
- Once the amounts are determined you would be issued your refund and your spouse’s refund would be applied to their prior debt.
For community property states the IRS defers to state laws when determining what portion of the refund can be kept and applied to the debt.
For the purposes of this blog we will be looking at injured spouse relief and how it is applied in the State of California.
INJURED SPOUSE RELIEF IN CALIFORNIA
Injured spouse relief, in regards to community property laws, starts with first dividing the refund amount in half and allocating each half to each spouse. This is called the one-half rule. This means that half the refund is already going to be kept and applied to the liable spouses debt.
The second step in the process is to determine whether state law allows a creditor to reach the other half of the community property to satisfy a debt. The community property laws in California state that a creditor may reach all community property to satisfy a debt incurred by the liable spouse, regardless of whether the debt was incurred before or after marriage.
However, the creditor is not able to reach any separate property belonging to the non-liable spouse to satisfy the debt of the liable spouse.
Let’s take a look at two examples:
Example 1
Husband (H) and Wife (W) are married in 2018. Prior to being married H incurred $10,000 of tax debt from a previous year. At the end of 2018 H and W file a married filing joint return and are due a refund of $2,000 that will be kept and applied towards the tax debt. W files form 8379, Injured Spouse Allocation Form, because it was solely her income that caused them to have a refund due.
- In a non-community property state, W would be issued her refund due to the fact that when all wages, deductions, credits, etc. are allocated it will be shown that the refund is due to her having overpaid during the year.
- In California, even though W files for injured spouse relief, her wages are deemed community property and therefore the refund attributed to those wages is community property and can be reached by the creditor, meaning the refund will be kept and applied to H’s tax debt.
Example 2
H and W are married in 2018. Prior to being married H incurred $10,000 of tax debt from a previous year. W has a rental property that was acquired prior to being married, which is deemed separate property and therefore any income derived from the separate property is separate income. H and W decide to file a married joint return for 2018 and are due a refund of $2,000 that will be kept and applied to H’s prior tax debt. W files form 8379, Injured Spouse Allocation Form, because the refund due is from the over-payment of estimated taxes on the rental income she received.
- In a non-community property state, the outcome would be the same as in example one.
- In California, because the community property laws specifically state that a creditor does not have the right to reach separate property to satisfy the debt of the liable spouse, the refund of $2,000 would be issued to W because the refund comes from rental income, which is deemed separate income from separate property.
For additional examples see, Rev. Rul. 2004-72.
PROCESSING TIMES
The IRS is required to process injured spouse claims within 45 days and they generally do. According to TIGTA (Treasury Inspector General for Tax Administration), the IRS accurately processed about 91% of the injured spouse claims submitted between Jan. 1, 2014 and May 28, 2015.
What you need to know is that if the IRS does not process your claim within 45 days and you are in fact due a refund, the IRS actually owes you interest on the refund. TIGTA found that out of the cases it examined 30% of the claims were not processed within the 45 day time frame and estimates that the IRS may have actually paid out $2.7 million in interest.
HOW LATE CAN YOU FILE FOR INJURED SPOUSE RELIEF?
For a refund offset by a previous tax debt, you generally have up to three years from the time the return was due or two years from the date the tax was paid and then later offset, whichever is later, to file for injured spouse relief.
For a refund offset by a previous non-tax debt (child support, student loans, etc.) you have up to six years from the time the return was filed to file for injured spouse relief.
Generally, it is advisable to file for injured spouse relief when you file the return if you are aware of a balance that will be due.
RELATED TOPICS
