Bonnie Lee founded Taxpertise in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. She is the author of "Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know.” Her office is at 450 2nd Street West, Sonoma, CA 95476 Contact her at 935.1755 or [email protected]
Taxpertise tips for an injured spouse
Dear Bonnie: I read your last column about getting your dependents before the ex could take them with great interest. But I have something of a different situation and it’s with my current spouse, not an ex. I wonder if you can help me. Because of this economy my husband went behind on his student loans so the IRS took our refund this year to bring them up to date. He was out of work for about six months last year; I’m the one who made all the money. So I really feel like they took MY refund for student loans he got before we were even married. Can they really do that? How do we stop them from doing it in the future if he doesn’t catch up? – Mad-as-hell-and-not-gonna-take-it-anymore in Petaluma
Dear Mad as Hell: What you speak of happens very often. They’ve even coined a term for it. You’re an Injured Spouse. The IRS and even California’s Franchise Tax Board will snatch up your tax refunds to satisfy other debts. And not just student loans either. They’ll take the money if you or your spouse:
Owes back child support,
Is delinquent on student loan payments or other federal agency debts,
Owes for state income tax liabilities. And the state will grab your refund to help out the IRS collect on past due income tax liabilities,
Must repay overpaid unemployment benefits.
Instead of a refund check you may receive a letter from the Treasury’s Financial Management Services Department (FMS) telling you the original refund amount, the amount taken, and the agency who received your money. If you did not receive a letter or if you have questions about the offset, or if they plan to offset, you can contact the FMS at 1.800.304.3107 or TDD 1.866.297.0157.
Even the IRS agrees that taking a refund that mostly belongs to the innocent party to pay on a debt that isn’t yours is unfair. There are a few things you can do about this. First of all, change the exemptions you claim on your form W4 on file with your employer so that you will have a breakeven situation rather than a refund that can be absconded at tax time. Use the worksheet on form W4 or speak with your tax pro to determine the number of exemptions you should claim to net either no refund or a small amount of tax due. A side benefit of this is a bigger paycheck and the knowledge that the government hasn’t had your money tax free all year.
A second option is to use married-filing-separate filing status. However, this may not be beneficial for maximizing the refund you could receive. There are however, many good legal reasons for using this filing status. Check with your attorney and/or tax pro to determine if this will provide the best protection for you.
Some people in this situation may be looking at a refund for 2010 or prior years and wonder how to guard it against the tax man. Well, there is help!
File form 8379 Injured Spouse Allocation with your tax return. The form is available at irs.gov. Part 1 contains a series of questions that qualify you for using the form. Part II asks for the names and social security numbers of the two spouses in the order listed on the tax return. Check the box to indicate which spouse has been injured. Part III is an allocation of income, adjustments to income, itemized or standard deduction, exemptions, other taxes (such as self-employment tax, tax on early withdrawal from a retirement plan, etc) and credits (except the Earned Income Tax Credit) between the spouses. Basically, the tax return data is split out to see who should get the lion’s share of the refund. The amount allocated to the spouse that owes the debt will be snatched to satisfy it. The remainder will be refunded to the now happy couple. If you file electronically the refund will be held up for about 11 weeks while they process it. If you are filing a paper copy, then write “INJURED SPOUSE” and highlight it in yellow at the top of page 1 of Form 1040. Make sure you also sign and date Form 8379 at the bottom of page 2. It will take approximately 14 weeks to get your refund from a paper-filed return.
Mad as hell, you’ve already filed your income tax return, but here’s some good news for you: It might not be too late to apply it to this year’s income tax refund! The IRS holds the funds for a certain amount of time before turning them over. File Form 8379 separately. Be sure to sign and date it then mail it to the IRS service center where you filed your original return. It takes approximately 8 weeks for the IRS to process the separately filed form. You could get your share of the refund back!
And every year you file while past due debts of this nature loom, be sure to include a new Form 8379 if you are expecting a refund.
