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Taxes owed by spouse/refund/bankruptcy

Customer Question

I am looking for help with a situation that has resulted from taxes my wife owed before we were married. First, some background because this is rather complicated. We live in California and were married almost three years ago. She owes the IRS approx. $25k and California about $5k. She was on disability when I met her. That ended shortly after we were married and she hasn't had a job since we've been together. She did sell cosmetics on one of those multi-level programs for a while, and using her SSN to get set up with that company led the state to find our joint checking account. This caused my wife to have to agree to pay them $110 per month.

She filed an offer in compromise with the IRS about nine months before we were married. The IRS took about a year and a half to get back to her, then declined the offer using totally erroneous information regarding her income. She wrote them a letter to correct it and that didn't get anywhere, either.

I filed as a single filer the last two years so the IRS/state wouldn't take my refund to cover her old debts. Now she is going to be filing bankruptcy soon re these debts and also some credit card debt from when she was single. (I know this isn't a huge tax debt, but her credit is bad anyway and any new loans we get are in my name only.) I'm planning to file a married filing jointly return because if I do married filing separately I have taxes due as well as AMT. If I do MFJ, I get a pretty large refund instead and no AMT. This puts me back in the situation, however, of being worried about the IRS/state taking my refund to cover her old debt. I don't think the IRS should benefit by their sloppiness and inaction regarding her OIC. I feel very strongly about that. If they had acted promptly and competently, this could have been resolved a long time ago and we wouldn't be resorting to filing BK. I found an "injured spouse" form that I can file that should at least get some of my refund to me. California, however, doesn't have an injured spouse provision.

My wifes father had bought her a car that was in his name. It had a high interest rate so I refinanced it about six months ago, but I stupidly put my wife's name on the title along with mine. I just wasn't thinking about the tax situation when I did that. We have about $8,000 equity in the car (which is worth about $18,000) so I am concerned about the IRS/state putting a lein on the car, but not sure what to do about it other than sell it, which I'd prefer not to do. I'm concerned that if I closed the account with the $110 monthly debit, the state might do some searching and find her name on the car.

So I have a few questions:

1. What is the best approach for me to take to get my tax refund this year? I'd prefer not to file as single this year because 1) it's not the right way to handle it, and 2) I'm concerned that with the upcoming BK filing it will create problems. I think she will have to put her married name on the BK filing and acknowledge that she's married. But it seems filing MFJ will cause some or all of my refund to be withheld. I don't want this to happen, especially since she is going to be filing BK. I've thought about filing for an extension and letting the BK happen before I file my tax return, but the IRS/state may require that she files a tax return as part of the BK process so they can see if she has any income/taxes due for 2004 - I don't know. This is confusing to me and I'd really appreciate some advice on how to handle it.

2. Is there anything I can do re having my wife's name on the car title besides selling the car? I know we can just re-title it and take her name off, but I've heard that this can look shady and create problems.

3. Should I file amended returns for the past two years to change my filing status to MFJ or MFS? I know I would probably get more money back if I did that, but again I don't want the IRS/state to get it and I also don't want to raise any red flags. Another alternative is to wait until after the BK to file the amended returns, but again there is the red flag issue - both on the tax side and the BK side.

Thanks
Submitted: 11 years ago.
Category: Tax
Expert:  Tammy F. replied 11 years ago.

 You have a lot of questions here so I'm going to answer them to the best of my ability.  If I leave anything out of you have questions, just let me know so I can clarify.


1.  If you file as married filing jointly, your entire return will be garnished to satisfy the debt.  Your only recourse if you choose to do this is to file as an injured spouse (form 8332).  This will request relief from your wife's debt and only HER portion of the refund will be garnished.  Your return will be evaluate and scrutinized and then they will distribute your portion.  It will take much longer to get your refund this way.  If she has no income, no portion of the return will be hers.


2.  All that you need to do is retitle the car.  It's fairly simple and you can handle it in a few minutes at the DMV. You'll have to pay taxes on it again and might have to re-register.


3.  If you amend your return from previous years, you will face the same problem as in #1 above.  If you file jointly, your portion of the refund will be garnished.  It's probably better to leave these alone.


 


When she files BK, the attorneys will do title searches and anything that is in her name will be flagged.  It will then be determined whether or not the item is a burden to her.  If it is, it must be disposed of. They typically do not consider a vehicle that is used to go to and from work as a burden.


I hope that I have answered your questions.


Let me know if you still don't understand.

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