Will you receive a tax refund from the IRS if you marry someone who owes back taxes to the IRS? If the IRS keeps your refund for the current year to pay your spouse’s premarital tax debts, what rights do you have to recoup the current year refund? For the answer to these questions, we have to consider the injured spouse rules.
Filing Status: MFS vs. MFJ
When a person is married at the end of the year, they have to elect to either file as married filing separate or married filing joint.
The benefit of filing separate is that each spouse is liable for only the tax liability reported on their own tax return. If one spouse is entitled to a refund and that spouse does not owe the IRS back taxes, the IRS will issue a tax refund to that spouse.
However, married filing separate will almost always result in the couple paying more in income taxes than if they had elected to file married filing joint. This is one of the reasons why many taxpayers elect to file as married filing joint.
Married filing separate can also present a number of challenges. And it may not be as equitable as it sounds. This is particularly true for couples who live in community property states, such as Texas.
Taxpayers who live in community property states generally have to report half of their own income and deductions plus half of their spouse’s income and deductions. So one spouse would report fifty percent of their income plus fifty percent of the other spouse’s income. The other spouse would do the same. This can cause the spouse that would not otherwise owe a tax liability to find themselves in a position of owing taxes. This is where the injured spouse rules come into play.
The Injured Spouse Rules
The injured spouse rules apply when a couple files a joint return that reports a tax overpayment, i.e., that requests a tax refund, and one of the spouses owes the IRS back taxes.
Absent these rules, the IRS would keep the full amount of the refund and apply it to satisfy the one spouse’s back taxes. Technically, the IRS would “offset” the back taxes with the overpayment. The authority for this is set out in I.R.C. § 6402.
There are several revenue rulings that explain how the IRS computes the injured spouse’s refund. As explained in this guidance, the IRS will typically use a two-step process to determine how much of the current year refund has to be refunded to the injured spouse:
Divide the spouse’s separate tax liability for the current year by total of both spouse’s separate tax liabilities for the current year.
Multiply the result of #1 by the joint tax liability reported on the tax return in the current year.
There are additional rules that apply to taxpayers who live in community property states, which are beyond the scope of this article. The IRS has issued separate revenue rulings that explain how the offset works in those states (see, e.g., Rev. Rul. 2004-74 for the Texas rules).
How to File an Injured Spouse Claim
The injured spouse claim is reported on a Form 8379, Injured Spouse Allocation. The form can be filed with the joint tax return, with an amended joint tax return, or separately.
Injured Spouse vs. Innocent Spouse Relief
It should be noted that injured spouse is different than innocent spouse relief. While injured spouse applies to a joint refund that would otherwise be applied to a tax debt for another year that the spouse does not owe back taxes for, innocent spouse relief applies to joint tax liabilities where it would be inequitable to hold one spouse liable for the tax debt. Follow this link to find out more about innocent spouse relief.