Divorce Tax Issues Including the Innocent Spouse Doctrine

 Posted on January 15, 2025 in Division of Property

Certain tax benefits are associated with filing a joint tax return for a couple considering or in the midst of a divorce. This can cause a couple to hold off on a divorce until after the new year or otherwise plan a divorce around tax considerations. Unfortunately, just as one spouse may hide assets during the division of marital assets, the spouse who is responsible for filing tax returns could underreport income on behalf of one or both spouses.

The spouse who had nothing to do with the underreporting could find his or her own tax refunds withheld in the future to satisfy a former spouse’s tax obligations. Along with joint tax returns, there are a number of tax issues that must be considered during a divorce, including how certain assets will affect each spouse’s tax burden, as well as how a business division affects taxes.

If you are uncertain how the division of assets during your divorce will affect your taxes or the taxes of your spouse, it is important to speak to a tax professional and an experienced Arlington Heights, IL, family law attorney.

What is the Innocent Spouse Doctrine?

If one spouse finds after your divorce that his or her ex was less than truthful on joint tax returns, there is something known as the innocent spouse doctrine that can potentially help. If the IRS believes one spouse is innocent of wrongdoing, that spouse can be relieved from liability so long as the following criteria are met:  

The couple must have filed a joint tax return.

• The innocent spouse must have had a good faith belief that the correct taxes were paid.  
• The spouse who prepared the tax return underreported income.
• When the tax return was filed, the innocent spouse was unaware of the underreported income.   
• The rules of fairness would not be upheld if the innocent spouse is responsible.
• The tax relief request by the innocent spouse must be applied for no later than two years from the first time the IRS tries to collect the deficiencies.

An individual who meets the criteria for innocent spouse relief will be relieved of all responsibility for the entirety of the taxes owed, along with the penalties and the interest, or could only offer relief for a portion of those taxes, penalties, and interest.

Division of Marital Assets and How That Could Affect Taxes

The division of marital property is not generally a taxable event; however, if personal and real property is sold so the proceeds can be divided, a spouse may be required to pay capital gains taxes (when the sale price exceeds the purchase price of the property). Property distributed pursuant to a divorce decree and subsequently sold by the receiving spouse could require taxes to be paid on the proceeds of the sale.

For example, if one spouse receives the marital home while the other receives stocks and investments of equal value if the house has a lower basis than the stock when both are sold, the spouse who had the stocks and investments could end up with significantly more money.

Tax Implications of Dividing a Business During Divorce

While the tax implications of dividing a business during divorce may not be immediate, they can happen eventually. If the business is owned 50/50 and divided equally, each spouse could pay capital gains tax on his or her half once the business is sold.   

If one or both spouses have paid themselves wages from the business that is not consistent with market standards, there can be consequences – perhaps more if one spouse underpaid himself or herself. This underpaid salary could be used to determine spousal support, which could end up being an unfair amount.

Contact a Rolling Meadows, IL Division of Marital Assets Lawyer

If you believe your divorce could have significant tax implications, it is important to address these issues as quickly as possible to ensure the division is equitable. When you have an experienced Arlington Heights, IL division of marital assets attorney from Law Offices of Donald J. Cosley in your corner, you can rest easy knowing Attorney Cosley will personally handle all aspects of your case. Call 847-253-3100 to schedule your free consultation.