How to Avoid IRS Trouble When Your Spouse Doesn’t File

You’re looking at serious IRS trouble if your spouse doesn’t file a tax return. Not only that, it could be a bad omen of things to come.

Here’s a question I received not long ago from “B,” an anxious reader who was facing this exact situation:

My husband is self-employed and has not paid taxes since 2001. I was not aware of this when we married.

He owes thousands and I do not see any way for him to pay. He wants me to file jointly for the three years we have been married because it would save him about $20,000 (not including penalties and interest). That is how those returns were prepared.

I am going to REFUSE to file a joint return! I am also seriously considering a divorce or a legal separation ASAP.

I want to be able to protect myself and my children’s future. What do I do in this situation? Divorce? Legal separation? Separate finances? NOT filing a joint return? Anything else?

B, I’m really glad that you are out there looking for answers. Filing a late tax return is one thing but your husband has taken this to a whole new level.  You’ve really got a full plate, but there are definitely things you can (and really must) do to protect yourself and your children.

Neal’s Notes:  If your family is having trouble with the IRS. it’s very possible that you have other financial trouble too.  Don’t be complacent.  Make  sure to attack the other financial challenges as well.

I am not an attorney or CPA, but there are a few steps you need to take right away – and you’ve touched on them. (The one thing you didn’t look at was IRS tax debt relief. Definitely look into that.)

First, separate your finances completely. Get your own checking account and have your salary deposited there. Do not allow your husband to deposit money into that account. If you do, it becomes “contaminated” and one of his assets as well. This defeats the purpose.

Don’t let him have anything to do with this account. You may want to name a beneficiary on the account for security purposes (the banks call this a Transfer on Death or TOD). Whatever you do, don’t name your husband. You want as much separation from him as possible. Unfortunately, you can’t change your IRA beneficiary without his approval.

With respect to the joint tax return, I’m no CPA but I wouldn’t want you to have your name on the return. With all due respect, it seems like your husband can’t really be trusted in the financial world right now. Unless he demonstrates that he’s cleaned up his act, I don’t want you to take any chances.

I wrote a post on innocent spouse relief not long ago. The basics of it are that you won’t be held responsible for erroneous tax returns if you didn’t know about the errors. But your case is a bit different. You haven’t signed any returns so the “innocent spouse” provision doesn’t apply – at least as far as I understand it.

You’ve been married for three years; he didn’t file a return during those years either; and you’ve known about this for the last 18 months. What concerns me most is that you also didn’t file a return for the last several years.

I suppose you could argue that you didn’t know and failed to file a return but this question is out of my pay grade. You need to call in a CPA who is really good at negotiating with the IRS.

With respect to a possible divorce or legal separation, this is a really tough one. On the one hand, I wouldn’t want you to build your life around someone who is irresponsible financially. I don’t think that’s fair to your children or yourself. On the other hand, who is to say that your husband won’t get his act together? It’s tough to know when to bail. But the stakes are really high.

For the time being, I’d focus on the following steps to avoid IRS trouble:

a. Separate your finances ASAP.

b. Speak to your own tax advisor and get current with the IRS – probably with a Married Filing Separately return.

c. Get a marriage counselor.

These three steps might be the wake-up call your husband needs.

You are absolutely right to call the marriage into question. You and your children deserve better. But your husband runs the risk of losing everything too. Hopefully, he’ll get the message.

What would you suggest B do?