Engaged and Worried About IRS Debt? What You Need to Know.
Written by Jack Naranjo.
Are you engaged to someone with significant IRS debt? Learn how community property laws in Texas might affect your earnings and property, and explore options to protect your financial interests.
When Your Fiancé/Fiancée Owes Money to the IRS.
Assume that A is engaged to marry B. They live in Texas. B owes the IRS over $100,000. A has income from her personal earnings and income-producing property (e.g., rental property).
Should A be concerned that the IRS could come after her income to satisfy B’s federal income tax liability?
Should B be concerned that, if B tries to apply for an installment agreement or an offer in compromise, the IRS will consider A’s income, which will be detrimental to resolving B’s IRS debt?
Answer: Yes, and yes.
Because Texas is a community property state, all income during marriage is generally community property unless a valid premarital agreement or marital agreement avoids community property rules.
Under Texas Family Code § 3.102, there are two kinds of community property;
a) sole management community property, and
b) joint management community property.
Sole management community property generally includes each spouse’s personal earnings and revenue from separate property (to the extent they are kept separate and not mixed and combined with other community property).
Joint management community property generally includes all “mixed and combined” community property.
The IRS states in the Internal Revenue Manual ("IRM") 25.18.4.8(1)(d) and Q&A 15 of Exhibit 25.18.1-1 that it can generally reach the following assets to satisfy the tax liability of B in the State of Texas:
• 100% of B’s separate property and community property under his sole management;
• 100% of A&B’s joint management community property; and
• 50% of community property under A’s sole management (e.g., 50% of her personal earnings and income from her separate property).
(Note: Special rules apply to homestead property.)
With regards to offers in compromise, if B tries to settle his IRS debt through an offer in compromise (on the basis of doubt as to collectibility), one-half of A's income will generally be included in the consideration of whether B's offer is adequate. The IRS applies Texas community property laws to determine the property available (including A's income) to settle the IRS debt. See Treas. Reg. 301.7122-1(c)(2)(ii)(B) and IRM 25.18.4.17 (06-05-2017). Expenses will be considered in the evaluation of the offer in proportion to the total income of the spouses considered in the offer.
Is there anything that A can do to protect her income?
Yes, a premarital agreement (more commonly known as a “prenup agreement”) or marital agreement (more commonly known as a “postnup agreement”) under Chapter 4 of the Texas Family Code may avoid community property rules and the harsh effects of community property rules on IRS collections.
The Internal Revenue Manual (“IRM”) states in 25.18.4.15(1) (06-05-2017) that, “The Service will honor [marital agreements] in accordance with state law…”
However, the IRS warns in IRM 25.18.4.15(3) (06-05-2017) that premarital and martial agreements that are unfair to creditors (including the IRS) may be challenged under fraudulent conveyance statutes. Premarital agreements (executed prior to marriage) are less likely to be considered a fraudulent conveyance, particularly if the liability was incurred after the spouses entered into the agreement. But, marital agreements (entered after marriage) may be examined more closely. Extreme caution must be exercised in drafting the premarital or marital agreement.
There are other rules that must also be taken into consideration. For example, if A takes a deed as her sole and separate property during marriage, in order for the IRS to respect this separate property characterization, the deed also contains a recital that the consideration was paid from separate funds of A. See Q&A 10 of Exhibit 25.18.1-1.
NOTE: While the Internal Revenue Manual (IRM) is the IRS' primary, official source of "instructions to staff" that relate to the administration and operation of the IRS, it is not intended to carry the weight of law. Treasury Regulations are regulations issued by the Treasury Department to provide guidance for new legislation or address issues that arise with respect to existing Internal Revenue Code sections. Under the recently overturned “Chevron doctrine” courts were required to defer to an agency’s reasonable interpretation of an ambiguous statute even where the court concluded that a different interpretation was better supported. The Chevron doctrine was recently overturned by the June 28, 2024 US Supreme Court decision in of Loper Bright Enterprises v. Raimondo, 603 U.S. ___ (2024), and its companion case, Relentless, Inc. v. Department of Commerce.
DISCLAIMER: The information provided in this article does not, and is not intended to, constitute legal advice. All information in this article is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.
Contact The Wilson Firm for help with your IRS matter. We are here to guide you.
