Divide or Be Conquered?

Petition for divorce, wedding ring and money. What happens to tax debts after divorce.


Why settling division of community property quickly can protect your assets

Did you know the IRS can collect from one spouse to pay for the tax debts incurred by the other spouse after separation as long as the other spouse is still in possession of assets that were community property? In US v. McGrew (Oct 3, 2016) the IRS was allowed to foreclose on the wife’s post-settlement separate property home because her husband’s unpaid federal income taxes occurred before the community estate was divided.

In McGrew, the spouses separated in February of 2002 and the marriage was dissolved in September of 2006, but the community property was not divided until September of 2009. The husband’s tax liens occurred during the tax years of 2001-2005, making those debts attributable to the community estate. While the family law court found that the 2000 tax year debt was attributable to the community and that the 2001 through 2005 debts were owed individually by the husband, this did not preclude the United States from foreclosing on the house that was previously community property. All of the tax debts became liens on the property once the tax was assessed and since those assessments occurred before the community estate was divided, division of the community estate did not preclude the IRS from foreclosing and selling the residence to satisfy the debt.

The important question raised from this case is, if the couple was divorced and had already divided their property, then how could the IRS foreclose on the property that was now separately owned by the wife? The property could be used to settle those pre-divorce liens because the community property was not divided until 2009 and the wife was still in possession of that former community property. As long as the community property is still possessed by one of the spouses, the IRS can collect what is owed by either spouse from what was community property prior to property distribution; it is the division of the community estate (as well as the recordation of a deed solely in the name of one spouse together with a marital settlement agreement), not divorce, that terminates liability.

The take-away is to know what you are getting into financially before marriage and it may be worth your while to get out of the settlement phase as soon as possible before too much additional damage can be done.

1-U.S. v. McGrew (October 3, 2016) United States Court of Appeals, Ninth Circuit, Case No. 15-55078

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