Experts weighed in heavily on this one. Collectively there are a number of criteria to explore. Each and every one of these experts essentially started off by stating the concern spouse MUST get his or herself an experienced tax lawyer. The need for a bankruptcy lawyer may come later. The criteria list began with the last tax filing’s marital status, was it jointly or married filing single? Did the bankrupting spouse honestly inform the concerned spouse about the degrading financial situation? Were the taxes calculated in such a way as to knowingly understate the tax liability? Did the bankrupting spouse honestly inform the concerned spouse about the possible or likely filing for bankruptcy? Did the separation occur after the last filing of taxes? Is the business jointly owned by the spouses? Are there any co-spouse-owned loans to the business? What was the concerned spouse’s knowledge about the failing business? All of this information will be critical to each and every argument that the concerned spouse makes against being liable for whatever tax burden comes from the failed business. If the bankrupting spouse provided little or dishonest information about the business, the tax burden, the tax filing, the likely bankruptcy in any aspect of the tax filing, the concerned spouse MAY have an argument against being made liable for the tax liability after the bankruptcy concludes. Fraudulent or intentional misstatements of the true condition of the business and the tax will be a millstone around the debtor spouse, when it comes to that. Under typical conditions IRS tax burden is not allowed to be excluded by discharge. This is Federal Bankruptcy Law (FBL). States have no say in this.
Back to the concerned spouse … If the separation occurred before the last tax filing AND OR the concerned spouse was not told about the true condition of the taxes or the business, the concerned spouse may have an argument of being an “innocent spouse”, an IRS designation, and may not be held liable for the other spouse’s taxes. The IRS clearly states, however, that a status of filing jointly cannot be altered to any other status. It is not clear as to why this is so. For the innocent spouse filing, there is publication 971 and forms 8857 and 12507 to read up on and to know about. This is certainly where a good tax lawyer will come in handy. There are a number of conditions that the “innocent spouse” will have to prove to be able to claim the relief of being an “innocent spouse” can bring. On passing the question and gaining that status, the IRS will even calculate what it sees as the innocent spouse’s liability is. The “innocent spouse” can do the calculating and filing his or herself if so desired. The IRS will be scrutinizing any information or correspondence or financial trail that might suggest that the innocent spouse is actually not quite so innocent after all. Anything that the concerned spouse can provide as objective evidence of being kept in the dark will help the innocent spouse situation.