Join us for our live event as we sit down with CPA, Gary Massey, to discuss how divorce impacts joint tax liability, when there might be relief granted for separation of joint liability, and other important tax considerations when navigating divorce from your spouse.
If you would like to speak with one of our attorneys, please call our office at (503) 227-0200, or visit our website at https://www.pacificcascadelegal.com.
To learn more about how Gary can help you, you can visit his website: https://masseyandcompanycpa.com/
Disclaimer: Nothing in this communication is intended to provide legal advice nor does it constitute a client-attorney relationship, therefore you should not interpret the contents as such.
Join us for our live event as we sit down with CPA, Gary Massey, to discuss how divorce impacts joint tax liability, when there might be relief granted for separation of joint liability, and other important tax considerations when navigating divorce from your spouse.
If you would like to speak with one of our attorneys, please call our office at (503) 227-0200, or visit our website at https://www.pacificcascadelegal.com.
To learn more about how Gary can help you, you can visit his website: https://masseyandcompanycpa.com/
Disclaimer: Nothing in this communication is intended to provide legal advice nor does it constitute a client-attorney relationship, therefore you should not interpret the contents as such.
Intro:
Welcome to Modern Family Matters, a podcast devoted to exploring family law topics that matter most to you. Covering a wide range of legal, personal, and family law matters, with expert analysis from skilled attorneys and professional guests, we hope that our podcast provides answers, clarity, and guidance towards a better tomorrow for you and your family. Here's your host, Steve Altishin.
Steve Altishin 0:28
Hi, everyone. Welcome to our Facebook Live broadcast. I'm Steve Altishin, Director of Client Partnerships here at Pacific Cascade Legal. And today, I have CPA, Gary Massey, to talk about understanding joint liability in regard to divorce and taxes. So Gary, before we started, can you tell us just a little bit about yourself?
Gary Massey 0:52
Well good morning, Steve. Thank you very much. It's a pleasure to be here. And I'm happy to tell you a little bit about myself. My name is Gary Massey. And I'm a CPA and I'm the owner of a CPA firm based in Atlanta. And our clients are here in Georgia, as well as throughout the United States, we focus on all types of tax matters relating to both individuals as well as businesses, we do accounting for our clients, we do tax return compliance, and we also do tax problem resolution, which means when people or businesses have problems with the IRS, or with the State Department of Revenue, whether it's related to income taxes, or sales taxes are whatever we are here to help. And we, we represent them for the government and we make the tax problems go away.
Steve Altishin 1:38
I love that. That's a dream come true. I love that. So I'm going to start with a basic basic question, which is, what are joint tax returns, and who can file them?
Gary Massey 1:50
So at a very basic level, there are different types of there are different ways of filing a tax return. And the most common that we see on a daily basis are people who file single, those are people who are not married. And then of course, once you get married, then you can file a joint tax return. That's called married filing jointly. There's another option called Married Filing single, which we're going to talk about, I'm sure, excuse me, married filing separately, it's not married, filing, married filing separately, and married filing jointly. So those are the topics that we'll probably be speaking about most, today. And it's very, very common to have a married couple filing jointly. And the reason that they file jointly, is that the tax return is that the tax liability is almost always significantly lower. So there are a lot of benefits, whether it's with credits, deductions, tax rates. So I would say in my practice, 95% of the married people file a joint tax return.
Steve Altishin 2:48
I like it. Just one question. And it just sort of sprung in my head when you were talking, which is, can you file a joint return if you were married at some point during the year, but then got divorced? I mean, what kind of happens on that?
Gary Massey 3:04
So everything goes on the last day of the year. So once you're divorced, then you don't file a joint tax return.
Steve Altishin 3:16
So we'll start talking about liability. And so married filing jointly, does that create a joint liability on the taxes? And how does that kind of work between spouses?
Gary Massey 3:30
Right. So that's a very important question. So there's good and bad associated with this. The good is that when you're a married couple, and you file a joint tax return, you're going to pay the lowest amount of tax possible. That's the good side. And that's why as I said it, probably 95% of the tax returns that I see, of married couples are married filing joint jointly. However, there's a caveat which is very important. And that's called joint and several liability. What that means is, when you file a joint tax return, you both sign the return which is required, then you are both equally liable for the tax that is on that tax return. It doesn't matter if you later get married, excuse me, and it doesn't matter later, if you get divorce, you're still jointly liable. So that is a very significant issue. Or maybe we should say even a responsibility when you sign a joint tax return. You are jointly either one of you is responsible, which means if there's ever an issue, and the government is going to go after you they can go after either party.
Steve Altishin 4:38
Dumb question, but even if I didn't have any income on my own, and it was all my spouse's?
Gary Massey 4:44
That's right. That's right. That's right. Even if it's all of your spouse's if you both signed it, we both signed the return you are jointly liable. So if something happens with one of the spouses, he or she leaves the country and is no longer around, and if you're the one who's still here, The IRS and the state are able to go after you and to attempt to collect the tax. So that's very important. So when I speak with a client, and they asked me this question, which they often do, I say, you know, as long as everything is good, and you're married, and you have every intention of staying married, and you're comfortable with what's on that tax return, go ahead and file a joint tax return. The alternative is married filing separately. So here too, you have a married couple, however, they're going to file two separate returns. So there's there's an additional costs are assuming that you have a CPA preparing your tax returns, there's a cost for a second tax return. So that's a bit of a downside. But there will be two returns filed and the income will be split. And then you are only responsible for the income that you generated.
Steve Altishin 5:52
Then what if you file a joint tax return, joint tax return, joint, married filing single, married finding single-- does it change? Does it go back and change the liability for when you filed a different way?
Gary Massey 6:09
Oh no, it's for that year, for that year. And once you file a joint tax return, you're not able to go back and change it and say, Well, really what you meant was to do it separately, you're not allowed to do that. Once you sign it in, authorize the return, then you are liable for what's on the return. So what does that mean? What's the issue? If the couple gets divorced, like we said, or one of the spouses disappears? Then the government is able to go after you? Yeah, yeah. So is there any way out of this? Is this any sort of way? You know, what if this person skipped in a foreign country and took everything and I never knew anything about So there, there are two exceptions that we should talk about. The first is called innocent spouse relief. And the second is called injured spouse relief, they're almost the same, there are slight differences. And there are different subcategories, under each one of them, I don't know that we have to go into all the details of each category, you can ask your CPA, how it works. But basically, if you're in a situation, where you can say, you know, I didn't know that my spouse was doing XYZ, and I should not be held responsible for that. So basically, that's called innocent spouse relief your spouse, but you're innocent of what your of what your spouse or your ex spouse did. So you have to basically you have to be able to look the IRS agent in the eye and say, I didn't know about it. I didn't know about it.
Steve Altishin 7:45
Even if you or the lifestyle was enhanced because of that?
Gary Massey 7:52
If you're a senior, you're absolutely right. That's the other side. The IRS is going to say, wow, you know, you lived a very opulent lifestyle, and you didn't know what was going on? That's the question. So you're going to have to be able to defend yourself, or your representative is going to have to be able to defend you and explain well, why didn't you know? So let's say you have a situation where you have a husband and wife working and the wife has as a job. So she's in the public schools teaching, and she makes whatever, whatever a teacher makes, let's say it's, I'll just make up a number, you know, 60, that, let's say $60,000 a year, I have no idea if that's the right number, something somewhere in that vicinity. And if the husband had some kind of a job, let's say he's a liar, and he's doing some kind of criminal activity, or he never filed a tax return, or the tax return shows, you know, vastly, vastly under reporting the income, the IRS assumes that you knew that a tax return had to be filed. So there are certain assumptions and certain questions which are going to be asked. But basically, you have to be able to say, like we said before, did you know about it, or you have to be able to say, Well, I just didn't know if you can do that with sincerity and honesty, then there's a chance for, for relief, innocent spouse relief. And what that does is it breaks that, that it breaks that bond of joint liability that we spoke about before, and that's where it starts to separate. And there are different ways of separating the income. Is it just a particular piece of income? Or is it all of the income there are different ways of doing that? But whichever way is appropriate for you and the different ways or based on if you're married, or if you're divorced, they're all different ways. But as to when you've gone to the IRS is it within two years is that after two years, there are different restrictions and different requirements, but basically it breaks that bond of joint liability that can be done when you're married, or after, or once you are divorced.
Steve Altishin 10:05
If you were never, let's say you never filed, you mentioned that. And five years later, after never filing, you know, the IRS comes after you. And they say, Okay, you owe this much money. This is what we figured out it would be, does that bring any joint liability back? Even if, let's say, again, you never made any income, your spouse made all the income. But no, it is a lot.
Gary Massey 10:34
So innocent Spouse Relief is predicated on the belief that you filed a joint tax return. So there is no joint tax, then you don't have joint liability. Got it. But the the problem and the opportunity is when there was a joint return filed. Now, if your spouse forged your signature, which can happen, you can prove that. So it could be you don't have a joint return. But all this would have to be discussed and demonstrated to the government. And we have to determine Did you have a joint return? Or there's a concept called tacit? What do they call it? tacit approval? of their return? In other words, if there if there was no if you didn't think that there had ever been a return, but he actually did anything he was actually signing for you. Does that mean that you gave tacit approval or not all this would be discussed. It's very fact specific. But the point to bear in mind is if you're ever in if, if a couple is in a situation where one of the members feels that there's something that's not right, right, there is a way out. And that's what this is, this is called innocent spouse, if you can prove your innocence, then there's relief available to you in this.
Steve Altishin 11:49
Is there a a time frame you need to file by? Is it sort of a thing where I'm innocent and I want to stay innocent, or is there a timeframe?
Gary Massey 12:01
No, it's generally two years. But there is one category of innocent spouse relief, which does not have two years. So we'd have to go through it through the different categories to see which is applicable. Some categories are for those who are still married. And some categories are for people who are born not divorced. Yeah. So depending on your situation, relief can be available to you. So for those people who who need it, they should call their CPA firm. I'm happy to help but they can call whoever they work for wherever they work with on their tax matters. And we would go through in great detail the facts around the case and see if we can make a good case for an innocent spouse relief.
Steve Altishin 12:45
So let's say the the IRS says yeah, I'm granting it. What does that mean? I mean, what is the relief?
Unknown Speaker 12:52
Well, so what it would mean, it depends on the on the type of relief. But what might happen is that the government would say, well, let's change the return as if they had filed separately. So the money earned by the husband goes to the husband side, and the money earned by the wife goes to the wife side, and each would be responsible only for their share. That's a typical, it's a common way of doing it.
Steve Altishin 13:15
The divorce, as we talked about, we do have a lot of divorces, we're we're a family law firm. And a lot of times a divorce judge will just say, Well hold on here, you spouse, you're responsible for paying X and you're responsible for paying Y. And by the way, you got to pay all the tax returns that you haven't paid. Doesn't that cut it off? The judge said you didn't have to pay it
Gary Massey 13:45
It's not binding on the IRS, the IRS can say they're still jointly liable. That's not binding.
Steve Altishin 13:52
Yeah. So what if you separate? Is there any sort of, I haven't lived in the household forever, but we're still married, and I maybe shouldn't be liable for some stuff?
Gary Massey 14:07
Are you legally separated? If you're legally separated, it's like being divorced, and then you're no longer married. So that that's, that is what is determinative, we would look to see what your legal situation is. And in that case, it's very, very good idea for the attorney and the CPA to be working closely on these matters. Because both can bring important information to bear on those decisions.
Steve Altishin 14:33
Got it. What if someone just made a mistake? What if it's not necessarily this person was evil and hid the stuff or anything like that, they just made a mistake?
Gary Massey 14:47
Well, it's the same thing. So who's responsible for that mistake? Yeah, who's responsible? It doesn't mean that it's criminal. You don't have to go to jail if you'd made an honest mistake. That's not criminal, criminal is when you have an intention to defraud the government. That's very bad. So like, I don't, I would never let any of my clients do anything that was intentionally fraudulent, would that we would never do that that's criminal, and we don't get involved with those type of clients. Well, people make mistakes. And then when you make mistake, you can amend the return. I know that, you know, there's this this, we ever seen The Sopranos? You know, yes, there was a scene in The Sopranos, where the husband who's a was a mafia guy, he's bringing home lots and lots of cash. And he's hiding it all over the house, and they live a very beautiful lifestyle. The question there would be if the IRS would ever come? Could the wife ever claim innocent spouse? Could she say, you know, I have no idea what my husband did for a living? That's like a great example. Imagine that, if the IRS came after the soprano, what would happen? Oh, well, someone's head bowling bag. I would say in that case, that the wife should have realized, yeah, these they let a beautiful lifestyle and beautiful home with very nice cars, and so on. So in that case, it is incumbent to be aware of what is being reported on those tax returns if you signed a joint tax return. In that case, the wife is going to be responsible because she she should have known that there was something going on.
Steve Altishin 16:34
We were talking before at one point getting ready, and I know you used another term, injured spouse relief. Now, is that just a different name for the same thing? Or is that something different?
Gary Massey 16:45
No, an injured spouse is slightly different, we don't see it as much. And happens when you have a situation where there's a married couple, and something. And there's a liability from before the marriage, where money is owed to the government and the IRS takes a tax refund. And instead of giving it back to the couple, keeps it to pay off that bill. So I had a client once where one of the I believe it was the husband, the husband had student loan debt, which hadn't been paid off or before they were married. But what happened is that the IRS when there was a refund, after the marriage, they took some of the refund to pay off the student loan, which is unpaid. So for the wife, it wasn't her fault. It wasn't her student loan. So that's called an injured spouse. She's been injured by this and she can get her portion of the tax refund back. So if anybody ever has that, it's a perfectly legitimate way to fix the problem as a part of a refund being being kept by the IRS, that's injured spouse relief.
Steve Altishin 17:53
If you've got, let's say I'm coming to you, and I am getting divorced, what should I be looking for to make sure I understand when it comes to this whole joint liability, joint tax liability, before I even start thinking about, you know, how we're going to divide up the property or do support?
Gary Massey 18:19
Well, let's say that someone owns a business, let's just make believe for the moment that the husband owns a business, yes, the wife is going to be responsible. Because if they filed a joint tax return, they're going to be jointly responsible, jointly liable. And we spoke before what happens if you don't want that liability? If you think maybe there's something fishy going on, or you're you're suspecting that you might get divorced at some point, and you just want to keep everything separately, then you know what, then pay the extra tax and do married filing separately. There's no shame in that. You just pay a little bit more tax, you're gonna have to pay for two tax returns instead of one. But you'll never have to worry about this whole issue of joint liability in that case. That's a perfectly legitimate thing to do.
Steve Altishin 19:06
That makes sense. I know that a lot of spouses coming into divorce, sometimes the biggest concern is what the other spouse is going to do with the money. You know, maybe for that they may want to consider, well, atleast don't file a joint tax return, maybe maybe not.
Gary Massey 19:24
Right, it's sort of like a prenuptial agreement. You know, it's a way of keeping things separately. So if you're worried about it, or here's another case, let's say you don't want your spouse to know how much money you make, for whatever reason I don't know why people do that. But let's say there's a case we for whatever reason, just don't want it known. So you could do married filing separately and then it's probably good.
Steve Altishin 19:48
Speaking of prenuptials, I don't suppose that gets you out of tax liability. That one side, I'll take on all the responsibility.
Gary Massey 19:59
No, no. Now, one thing that we should talk about before it gets too late because we, we don't want to forget it, that's if you have one CPA representing both the husband and the wife, and they're getting divorced, I'm just gonna ask them, that that can happen, that can happen. And I wouldn't want to be in that situation because I have a moral and legal responsibility towards all of my clients. So if the husband and wife are getting divorced, I have responsibility to both of them. And while while it could be that the husband or the wife or the ex, or the each party could sign a waiver, which would absolve me of that responsibility, I wouldn't want to be in that position. Right? So in that case, it's best to get another CPA firm, and then you have a CPA representing both of them. But that's a smart thing to do.
Steve Altishin 20:50
Well, as a CPA, even over and above tax issues, would you consider potentially a good idea that they not just have the same CPA once they're in a divorce? Or do you think that's okay?
Gary Massey 21:07
Once they're in a divorce, they should have their own CPA. But as I said, it's possible to sign a waiver to say that's okay. But you know, why not keep everything separate? Keep everything confidential, keep everything separate? That's what I would do. So we're a little more expensive, but each party has to have their own representation. But I think it's a smart thing to do. Yeah.
Steve Altishin 21:32
I mean, there are tax implications, I would imagine, of property division, and one side may get a better tax consequence. And then the other side, and so they each need their own CPA.
Gary Massey 21:45
Right? Right. That's why you don't, I would not want to be advising both of them.
Steve Altishin 21:51
Yeah, yeah. Well thank you. Sorry, that was our dog. But thank you very much for joining us today. That was really, really interesting. I love the idea of understanding and knowing the tax consequences, not only of what you've done, but maybe how you can potentially get out of them if you really are sort of a victim. So thank you very much for talking to us about that.
Gary Massey 22:19
It's my total pleasure, Steve, happy to be here today.
Steve Altishin 22:23
Before we go, I want to let you have the opportunity to let people know how they can get a hold of you, in case they need some advice.
Gary Massey 22:30
So I would be happy to work with the clients or friends of Pacific Cascade Legal. I'm happy to be of assistance. Although I'm based in Atlanta, Georgia, we have clients throughout the United States, as a CPA firm, we are authorized to represent clients in all 50 states, and happy to do so. I will give you my cell phone number people can call me directly it's 404-660-5905. And the office number is 678-235-5460. And I believe that the shownotes will contain the link to our website, as well as the email address, but I'll give it to you just in case. We're at https://masseyandcompanycpa.com/, and the direct email to me is gary.massey@masseyandcompanycpa.com. And I am happy to be of assistance.
Steve Altishin 23:31
Well thank you, and again, to take a subject that's really complicated and make it understandable for people like me, that's not easy to do. And everyone else thank you for joining us. Anyone who has further questions on today's topic, you can either post it here or you can contact me directly. If you do happen to post it here we can also help connect you with Gary. So until next time, stay safe, stay happy and be well.
Outro:
This has been Modern Family Matters, a legal podcast focusing on providing real answers and direction for individuals and families. Our podcast is sponsored by Pacific Cascade Legal, serving families in Oregon and Washington. If you are in need of legal counsel or have additional questions about a family law matter important to you, please visit our websites at pacificcascadelegal.com or pacificcascadefamilylaw.com. You can also call our headquarters at (503) 227-0200 to schedule a case evaluation with one of our seasoned attorneys. Modern Family Matters, advocating for your better tomorrow and offering legal solutions important to the modern family.