The IRS is Not a Party to Your Divorce, Your Agreement Does Not Bind Them

Divorce IRA
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When a couple signs the dotted line of their divorce agreement, they should know that the IRS is not bound by the terms of that agreement. Evidenced in the case T.C. Memo 2017-80, the Tax Court has sided with the IRS in saying that it is not bound by the terms of a couple’s divorce agreement.

Sam and Mae signed a divorce agreement in 2013 in which the parties agreed that each would both be liable for 50% of their tax liabilities from prior years. In 2013, the couple received deficiency notices for their 2008 and 2009 jointly filed tax returns. In the notice, the IRS disallowed the deductions for rental property losses claimed during those years. In 2014, Mae requested that the IRS relieve her of joint and several liability for those years. In 2015, Sam made his own request for relief. The IRS denied both requests and the parties took the matter to the US Tax Court.

Shortly before trial, the IRS conceded that for each year Mae should be relieved of her joint and several liability for the deficiencies caused by the denial of the rental losses from Sam’s rental property, 28% and 41% of the total rental losses for 2008 and 2009. The IRS also conceded that Sam should be relieved of his joint and several liability for the adjustments arising from Mae’s property, 72% and 59% respectively. Sam and Mae did not contest to the IRS’s concessions. However, they stated that as an alternative to the IRS’s concessions, they would be willing to each be liable for 50% of each year’s notice of deficiency liabilities.

Unsurprisingly, the Tax Court ruled in favor of the IRS. The Court observed that while the divorce agreement establishes the parties’ rights against each other under state law, it does not control their liabilities to the IRS. The Court quoted a General Accounting Office report which stated: “Divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior returns are handled, i.e., one spouse is entirely liable, both spouses are equally liable, or some other permutation. However, the IRS is not bound by these divorce decrees because it is not a party to the decree.”

For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services, contact Sal Ambrosino at 301.231.6272 and sambrosino@aronsonllc.com.

About Sal Ambrosino

Sal Ambrosino has written 8 post in this blog.

Salvatore Ambrosino is a senior manager in Aronson’s Professional Services Industry Group. He has over 20 years of public accounting experience, providing a broad range of services to closely-held businesses and the individual owners of those businesses. Since 2005, he has focused on providing assurance and tax services to service firms, retailers, manufacturers, software developers, internet publishers, and hi-tech manufacturers.

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