MFS & Community Property State

[Terry D EA]

A client who lives in a community property State, (CA), filed a MFS return for 2015. All of the rules regarding community income, expenses, etc; were followed. The couple were in the process of separating at the time. My client is being told by their now ex; that the amount they owed is considered community debt and my client now owes half of what the ex spouse owes. This seems to negate the right to file MFS. Has anyone ever dealt with this? Is there any basis for the ex spouse's claim? The ex spouse's lawyer is stating that because they still lived together in the same residence, my client is responsible for half. I have to say that I am not well versed on community property State rules on income and debt, but again this seems questionable at best.

[Terry D EA]

After some research, I have found the MFS tax filing does not hold the non-liable spouse liable for the liable spouse's debt. An innocent spouse form may be needed. These rules are complex at best and there are indications of some circumstances where the IRS may levy on the non-liable spouse but there is relief for the non-liable spouse as well. So, for clarification, the lawyer in this case is using scare tactics to get my client to pay their ex-spouses tax debt. There is nothing relating to living in the same household when the tax liability was incurred as a determining factor for liability. Here is the publication I found. I know publications are non- authoritative, but this pub does have CFR regulation codes for further review. Could be useful information for all on this board.

 https://www.irs.gov/irm/part25/irm_25-018-004.html

[Pacun]

Careful with this one. While the IRS cannot force your client to pay, a judge can force him to pay his share of all debts including the tax debt.

[jklcpa]

Terry, be careful. You are talking about tax law here and the lawyers are talking about state divorce laws in that community property state. I don't know about CA law, but what the ex's attorney said may be true. It's very complicated, but in general, all the property and debt belong to the "community", not to the individual, and that includes earnings according to one site I read. I'd assume that would follow to the withholding and tax effects also. 

Here's one link I found: http://www.courts.ca.gov/1039.htm

[jklcpa]

Here's another link from the CA courts that has a link to Form FL-142 that each party fills out lising the assets and debts, and both sections do include a place to list tax refunds or tax debts with details required. http://www.courts.ca.gov/1254.htm

I think your client needs to rely on his or her attorney for this.

[BulldogTom]

Terry,

CA Community Property Law is not as complicated as you might think.  The important date is the day community ends.  CA defines that as the day the couple split with no intention of returning to community and in fact never resume community.  Case law in the past has defined that date as the last day they lived in the home together.  (There is a new law that is on the Governor's desk that would change the law, and it may be signed by now, that changes that definition, allowing ex's to stay in the same home if it is because the spouses cannot afford housing.)

So what you need to know is the date that community ended.  It is not the date the divorce is finalized.  From there, you will know if there is a period of community in the tax year in question where the spouses have joint liability for debts.  But if the split of income and withholding and deductions was properly done on the MFS returns as you say, the date that community ended would have been used to split the income and the liability for that year should have been properly divided between the spouses in that year.

Is there an audit on either spouse's MFS return for the year in question?  Was there a period of community in the MFS year they filed?  If there was a period of community, was the income, deductions and withholding split properly during that period?  Did the lawyers have anything to do with the MFS return?  Is the divorce final?

If there was no period of community in the MFS year, then the issue is moot because each of the spouses would have only their own liabilities for the year.  If there was a period of community, and as you say, the return was properly filed with the community period properly allocated to each spouse, then the issue is moot as well, unless the IRS tries to collect from one spouse for the debt of the other.  It is not part of the divorce and the lawyer should stay out.  It is pure tax law and collections and if the return is correct, you should be able to show that to the IRS for your client.  Not fun, but doable.

If the divorce is not final, it is a whole new ballgame, because the lawyers will screw up the whole thing.  Be careful, because when I have gone down this road with the attorney's, they will generally prefer to mix this stuff up with other issues (child support, property settlements, visitation, etc.) and settle it out.  If your client's attorney is not well versed on the subject, they will charge your client for their education on the subject, and it will cost a great deal more than what the tax savings are to be gained.  It will generally string out the divorce proceedings.

Tom
Newark, CA

[Terry D EA]

Thanks Tom. The community ended when they filed for legal separation and they are now divorced. The major issue at this time it the ex-spouse is filing for custody of the minor child and the ex's lawyer is bringing all of this into the equation. I am not going to advise anything here as again this is involving State law and specifically tax law. I have always been under the impression that no court judge could overrule the IRS or order a disposition that is contrary to the IRS regs. Again, I think this is a scare tactic and an attempt to confuse. My client cannot afford an attorney. They have had one in the past which changed the tone of things. They are contacting that attorney and trying to make some type of payment agreement. From this point, I am staying out of this. This situation is near and dear to me. Because this is a public site, I refuse to make any further connections or indications as to who this client is and am leaving out many details. Thank you for the advice of being careful. Judy I appreciate your replies but again, this divorce is final.

13 minutes ago, BulldogTom said:

Terry,

CA Community Property Law is not as complicated as you might think.  The important date is the day community ends.  CA defines that as the day the couple split with no intention of returning to community and in fact never resume community.  Case law in the past has defined that date as the last day they lived in the home together.  (There is a new law that is on the Governor's desk that would change the law, and it may be signed by now, that changes that definition, allowing ex's to stay in the same home if it is because the spouses cannot afford housing.)

So what you need to know is the date that community ended.  It is not the date the divorce is finalized.  From there, you will know if there is a period of community in the tax year in question where the spouses have joint liability for debts.  But if the split of income and withholding and deductions was properly done on the MFS returns as you say, the date that community ended would have been used to split the income and the liability for that year should have been properly divided between the spouses in that year.

Is there an audit on either spouse's MFS return for the year in question?  No  

Was there a period of community in the MFS year they filed? Yes

If there was a period of community, was the income, deductions and withholding split properly during that period? Yes

Did the lawyers have anything to do with the MFS return? No

 Is the divorce final? Yes

If there was no period of community in the MFS year, then the issue is moot because each of the spouses would have only their own liabilities for the year.  If there was a period of community, and as you say, the return was properly filed with the community period properly allocated to each spouse, then the issue is moot as well, unless the IRS tries to collect from one spouse for the debt of the other.  It is not part of the divorce and the lawyer should stay out.  It is pure tax law and collections and if the return is correct, you should be able to show that to the IRS for your client.  Not fun, but doable.

If the divorce is not final, it is a whole new ballgame, because the lawyers will screw up the whole thing.  Be careful, because when I have gone down this road with the attorney's, they will generally prefer to mix this stuff up with other issues (child support, property settlements, visitation, etc.) and settle it out.  If your client's attorney is not well versed on the subject, they will charge your client for their education on the subject, and it will cost a great deal more than what the tax savings are to be gained.  It will generally string out the divorce proceedings.

Tom
Newark, CA