Posted on January 1, 2021

IRS Tax Debt And Divorce In Illinois

A broken marriage can be the final result of a series of financial disasters. When a couple experiences loss of income, additional expenses and debt, that couple will end the year without paying their taxes in full. That leaves the couple in debt to the IRS and the local state government.

Finally, the strain of all their financial problems can cause a couple to divorce. What happens to IRS tax debt in an Illinois divorce?

Debt And Divorce In Illinois

Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 503(d)

“”marital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 503(a) (emphasis mine)

If the debt to the IRS was incurred while you were married, it will be considered a marital debt and the responsibility for the debt can be divided between the two parties in an Illinois divorce.

If the IRS debt occurred in years prior to the marriage, that party will be responsible for that debt. Pre-marital debts are deemed non-marital and thus not divisible under Illinois law.

“[T]he court shall assign each spouse’s non-marital property to that spouse.” 750 ILCS 5/503(d)

Illinois courts shall consider debts to be non-marital if they fall into the following categories

“(3) [debt] acquired by a spouse after a judgment of legal separation;

(4) [debt] excluded by valid agreement of the parties, including a premarital agreement or a postnuptial agreement;

(6) [debt] acquired before the marriage…

(6.5) all property acquired by a spouse by the sole use of non-marital property as collateral for a loan that then is used to acquire property during the marriage; to the extent that the marital estate repays any portion of the loan, it shall be considered a contribution from the marital estate to the non-marital estate subject to reimbursement;

(7) the increase in value of non-marital [debt]…” 750 ILCS 503(a) (emphasis mine)

Asking An Illinois Divorce Court To Divide IRS Debt

If both parties signed a joint tax return, the taxes owed in that year are going to be deemed marital and divisible.

A 50/50 division of debts is not required in an Illinois divorce. If the tax returns were filed separately so the IRS debt is only allocated to one party, then an argument can be made that the IRS debt should remain with that party after the divorce.

“The Act does not require an equal division of marital property, but an equitable division” In re Marriage of Jones, 543 NE 2d 119 – Ill: Appellate Court, 1st Dist. 1989

A party can ask for an equitable or unequal division of debts for a variety of reasons.

Illinois courts can consider “each party’s contribution to the acquisition, preservation, or increase or decrease in value of the marital or non-marital property” 750 ILCS 5/503(d)(1)

The failure to pay taxes can be argued to be a “contribution to the…decrease in value of the…marital property”

Furthermore, where did the money go that was supposed to pay the taxes even go?

If that tax money was spent for a non-marital purpose by either party, the court can consider “the dissipation by each party of the marital property” 750 ILCS 5/503(d)(2)

Allocating a debt in its entirety is an elegant solution for a divorce judge to punish dissipation or other activities related to the failure to pay taxes. However, an Illinois divorce judge should be reminded that any allocation of marital debt must be made “without regard to marital misconduct” 750 ILCS 503(d)

Debt is not always divided by an Illinois divorce court. If a party accrued the debt and the can pay the debt, the court may allocate responsibility for the entirety of that debt to that party. “Where one party is substantially responsible for the creation of the debt and has a substantially greater capacity to earn money, it is not an abuse of discretion for the trial court to assign the overwhelming majority of debt to that party.” In re Marriage of Werries, 247 Ill. App. 3d 639, 649-51 (1993)

“[W]hen the income and tax liability of one party far exceed the income and tax liability of the other party, it may be an abuse of discretion to order payment of both parties’ income taxes out of the marital funds because this inadvertently penalizes the party with the lower income.” In re Marriage of Charles, 284 Ill. App. 3d 339, 346 (Ill. App. Ct. 1996)

Actually Dividing IRS Tax Debt In An Illinois Divorce

If both parties owe the IRS mutual tax debts, one of two things is going to happen.

  1. One party will be exclusively responsible for the IRS tax debt and indemnify the other party for any payments owed to resolve that debt.
  2. The parties will have to agree to work together to resolve their tax debt in the future.

Both options hinge on the biggest factor involving tax debt: tax debt is negotiable.

The IRS has the authority to accept an “offer in compromise.” An offer in compromise is an agreement between the IRS and a taxpayer that settles the taxpayer’s tax liabilities for less than the full amount owed.

“An offer in compromise of taxes, interest, delinquency penalties, or specific penalties may be based on either inability to pay or doubt as to liability. Offers in compromise arise usually when payments of assessed liabilities are demanded, penalties for delinquency in filing returns are asserted, or specific civil or criminal penalties are incurred by taxpayers.” 26 CFR § 601.203(a)(2)

Proving an “inability” to pay is all that’s required to turn a massive tax debt into a manageable tax debt.

Divorcing parties can either work together to prepare this offer in compromise or one party can be exclusively responsible for the offer in compromise and it’s subsequent payment.

The party which accepts the responsibility to prepare the offer in compromise and the subsequent negotiated tax debt is taking a risk…and should be rewarded for that risk.

So, the party which accepts the tax debt should receive an offset in either additional assets awarded to them or having the other party absorb different marital debt.

This begs the question, what is tax debt really worth when it can always be reduced by an uncertain amount via an offer in compromise? A spouse should negotiate their marital assets and debts with this in mind.

The party that accepts the tax debt may receive an equivalent value of assets and then reduce the tax debt to pennies on the dollar. So, accepting tax debt in exchange for assets may be a big net win in the end.

But, this same principle applies to almost any unsecured debt. Credit card debts can also be negotiated or even discharged completely via bankruptcy (with massive impact on the credit ratings of the party in either case)

Debts which are fixed to an object such as a car or a house have a simple rule in divorce: if you keep the asset, you also keep the debt. These debts may be readjusted through refinancing post-divorce or discharged via bankruptcy.

IRS and other tax debts can never be discharged in a bankruptcy.

“A discharge… does not discharge an individual debtor from any debt for a tax or a customs duty” 11 U.S. Code § 523

Debts, in reality, have no fixed value. The allocation of debts should not be equally balanced against assets when negotiating a Marital Settlement Agreement.

Because of this, it is important to have an experienced and sophisticated negotiator who can guide you to a solution to trade negotiable debt for valuable assets. Contact our Chicago family law firm for a free, no-obligation consultation with a Chicago divorce attorney,

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Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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