Section 5. Injured Spouse
Read what the IRS Manual – from the horses mouth…
25.18.5 Injured Spouse
25.18.5.1 Background – IRC 6402 Offsets
25.18.5.2 Service Procedures After An Injured Spouse’s Claim Is Filed
25.18.5.3 Calculating the Injured Spouse’s Share of the Overpayment
25.18.5.4 Allocating Items in Community Property States
25.18.5.5 Items of Separate Property
25.18.5.6 Allocating Withholding and Estimated Tax Payments
25.18.5.7 Items With Special Allocation Rules
25.18.5.8 Determining How Much Can Be Offset
25.18.5.9 State Law Remedies for Unpaid Federal Taxes
25.18.5.10 Injured Spouse Claims Involving Federal Tax Offsets in Texas
25.18.5.11 Multiple Obligations: Order of Application
25.18.5.12 Offsets Without a Joint Return
25.18.5.13 Injured Spouse Examples
Exhibit 25.18.5-1 Amount of Overpayment That Can Be Offset To Satisfy an IRC 6402 Debt
25.18.5.1 (03-04-2011)
Background – IRC 6402 Offsets
IRC 6402 gives the Service the ability to offset overpayments to satisfy certain unpaid debts. These debts include:
Unpaid federal tax liabilities.
Past due child support.
Past due debts owed to other federal agencies.
Past due legally enforceable state income tax obligations owed to a state.
Creation of the Right to Offset for Debts. Past due debts owed to other federal agencies, past due child support and past due legally enforceable state income tax obligations become eligible for offset after receipt by the Secretary of the Treasury of a notification from the federal agency or the state. IRC 6402(c), IRC 6402(d)(1) and IRC 6402(e)(1). Unpaid federal tax liabilities are eligible for IRC 6402 offset upon assessment. No preliminary notices are required before an offset can be made. Fulgoni v. United States, 23 Cl. Ct. 119, 91-1 U.S.T.C. ¶50,256, 67 A.F.T.R.2d ¶91-462 (1991).
How Offset Issues Arise. When spouses file joint income tax returns, each spouse has a separate interest in the jointly reported income and in any overpayment. Rev. Rul. 74-611, 1974-2 C.B. 399, amplified by, Rev. Rul. 85-70, 1985-1 C.B. 361. If both spouses are liable for a debt described in IRC 6402, the entire overpayment may be offset. Offset issues arise where spouses file joint returns and only one spouse owes a IRC 6402 debt. In this circumstance, an allocation must be made to determine the liable spouse’s interest in the overpayment, the amount that can be offset for the liable spouse’s debt, and the amount to be refunded to the nonliable spouse. Rev. Rul. 80-7, 1980-1 C.B. 296, amplified byRev. Rul. 87-52, 1987-1 C.B. 347. Due to different property rights in income tax and withholding and other credits, there is a difference in the allocation process for community property states as opposed to the other states. Rev. Rul. 85-70, 1985-1 C.B. 361.
Injured Spouse Claims. If spouses file a joint income tax return and an obligation described in IRC 6402 is owed by one of the spouses, the Service will generally offset the entire overpayment. Rev. Rul. 84-171, 1984-2 C.B. 310. If the spouse who does not owe the obligation (referred to as the “injured spouse”) files a claim for his or her share of the overpayment (referred to as an “injured spouse claim”), the Service is required to refund his or her share of the overpayment. IRM 25.15.1.2.5, Relief from Joint and Several Liability-Injured Spouse Claims; 31 C.F.R. §§ 285.2(f) and (g). An injured spouse obtains his or her portion of the overpayment by filing a Form 8379, Injured Spouse Allocation. IRM 25.15.1.2.5, Relief from Joint and Several Liability-Injured Spouse Claims. An injured spouse claim can also be filed with an original return. As will be discussed below, in some circumstances the Service may have a common law right under state law to offset all or part of the injured spouse’s community property share of the overpayment. These rights vary from state to state. IRM Exhibit 25.18.5-1, Amount of Overpayment That Can Be Offset To Satisfy A IRC 6402 Debt, contains examples of the application of injured spouse rules in various states and for various types of liabilities.
Injured Spouse v. Innocent Spouse. Injured spouse status and innocent spouse status are frequently confused with each other. Innocent spouse status relieves a spouse of the responsibility for paying taxes that may then be collected from the other spouse. Injured spouse status involves obtaining a refund of a spouse’s interest in an overpayment that has been offset under IRC 6402.
25.18.5.2 (02-15-2005)
Service Procedures After An Injured Spouse’s Claim Is Filed
Offsets for Debts Other Than Federal Taxes. If an injured spouse claim is filed by a spouse in a community property state, the Service needs to determine how much will be refunded. If the debt to which the offset was applied is not a federal tax liability, the Service determines what portion of the overpayment represents the injured spouse’s share of the overpayment and refunds it.
Offsets for Federal Tax Debts. If the debt involved is a federal tax liability, the Service goes through a two-part procedure to determine how much will be refunded. Rev. Rul. 85-70, 1985-1 C.B. 361. In the first part, the Service determines each spouse’s community property share of the overpayment. Rev. Rul. 85-70, 1985-1 C.B. 361. The Service will also determine if any portion of the overpayment represents the liable spouse’s separate property. The liable spouse’s community property and separate property share of the overpayment is the minimum amount that will be applied to the debt. The second part of the two-part process is to look to state law to determine if there is a common law right to setoff more than 50% of the community property portion of the overpayment. In a state where a creditor can reach an additional portion of community property to satisfy the separate liability of one of the spouses, the Service can exercise this right and claim a larger portion of the overpayment. Rev. Rul. 85-70, 1985-1 C.B. 361. As will be discussed below, no portion of the injured spouse’s share of the community property overpayment can be reached for a IRC 6402 debt not relating to federal taxes, such as child support, state income taxes or other non-tax federal obligations (under IRC sections 6402(c), (d) or (e)). The second part of the procedure only applies to claims for federal taxes (under IRC 6402(a)).
25.18.5.3 (03-04-2011)
Calculating the Injured Spouse’s Share of the Overpayment
Injured Spouse’s Share of the Overpayment. The injured spouse’s share of the overpayment is computed by subtracting that spouse’s share of the joint liability, determined in accordance with the separate tax formula, from that spouse’s contribution of credits toward the joint liability. The amount credited cannot exceed the amount of the joint overpayment.
Separate Tax Formula. Under the separate tax formula, a spouse’s share of the joint liability is computed using the separate tax formula, as follows:
Injured Spouse’s Separate Tax Liability ÷ Total of Spouses’ Separate Tax Liabilities × Joint Tax Liability Shown on Return = Injured Spouse’s Share of Liability
SeeRev. Rul. 85-70, 1985-1 C.B. 361; Rev. Rul. 80-7, 1980-1 C.B. 296, amplified byRev. Rul. 87-52, 1987-1 C.B. 347, incorporating by reference Treas. Reg. 20.2053-6(f). As the formula shows, it is necessary to calculate each spouse’s separate tax liability.
Injured Spouse’s Separate Tax Liability. To determine the injured spouse’s separate tax liability for purposes of the separate tax formula, each spouse’s tax liability must be determined as if they filed separate returns. Rev. Rul. 80-7, 1980-1 C.B. 296, amplified by Rev. Rul. 87-52, 1987-1 C.B. 347; Treas. Reg. 1.6654-2(e)(5)(ii)(B). This requires an allocation of income and deductions between the spouses.
Allocating Credits. After determining each spouse’s share of the tax under the separate tax formula, it is necessary to allocate and apply the credits (e.g., withholding, estimated tax, and earned income credits) to each spouse’s tax liability to determine his or her share of the overpayment. Under no circumstances can an injured spouse be refunded more than the joint overpayment. Thus, for example, it is possible under this formula for the liable spouse to not have sufficient credits to cover his or her share of the tax liability, and for the injured spouse’s share of the credits (when applied to his or her liability) to exceed the joint refund. In this circumstance, the injured spouse is entitled to a refund only to the extent of the overpayment on the joint return. See Rev. Rul. 85-70, 1985-1 C.B. 361.
State Community Property Law Presumptions. State community property laws create a presumption that property received by spouses is community property. Therefore, in allocating income the Service will assume that the items on the return are community property unless the taxpayers prove otherwise or the law provides that particular items of income, deductions or credits are the separate property of one of the spouses. See Rev. Rul. 85-70, 1985-1 C.B. 361.
25.18.5.4 (02-15-2005)
Allocating Items in Community Property States
Generally. As previously discussed, to do the calculation based on the separate tax formula, the income, deductions and other tax items must be allocated between the spouses and separate tax liabilities must be determined. With respect to spouses in community property states, there are special rules that apply to income and deductions. These rules are more fully set forth earlier in IRM 25.18.1, but some common issues that arise are discussed in this section.
Allocating Income. As previously discussed, state community property laws presume that property acquired by spouses is community property. However, the Service will not treat an item as community property if it is clear from the face of the return that federal or other law requires that the item be treated as separate property. See discussion below for examples of items treated as separate property income by law. If items are community property income, each spouse is considered to be the recipient of half of the item. In an injured spouse allocation, items of community property income should be allocated 50% to each spouse.
Deductions. Deductions associated with income are generally characterized in the same manner as the income. Therefore, for example, if Schedule C income is treated as community property and allocated to both spouses, any Schedule C deductions are also treated as community property and split. Deductions that are not related to income (e.g., medical, charitable contributions, property taxes, state taxes) are split, unless it is established that they were paid with separate property, in which case they would be deductible by the spouse whose separate property was used to pay them. Powell v. Commissioner, T.C. Memo. 1967-32; see also Hunt v. Commissioner, 47 B.T.A. 829 (1942); Bishop v. Commissioner, 152 F.2d 389 (9th Cir. 1945); Commissioner v. Newcombe, 203 F.2d 128 (9th Cir. 1953); Keeter v. United States, 97-2 U.S.T.C. ¶ 50,940, 80 A.F.T.R.2d ¶ 97-5640 (E.D. Cal. 1997). These rules apply to allocations of deductions for injured spouse calculations.
Effect When All Items Are Community Property. When all items on the return are community property, each spouse will be entitled to half of the overpayment. This happens frequently where all of the income on the return is from wages.
25.18.5.5 (02-15-2005)
Items of Separate Property
In spite of the state community property law presumption, some items of income, deduction or tax may be separate property. This usually occurs because the spouses have provided proof that the items are separate property or because federal law dictates that the items are separate property. When this happens, the affected items should be allocated to the spouse who owns them. Common circumstances where items are separate property include the following:
Marital Agreements. The spouses may have entered into an agreement under state law characterizing all or part of their income as separate property. This would require proof by the spouses of the agreement and compliance with state laws governing such agreements.
Income from Separate Property. In some states, dividends, interest or rents from separate property are separate property. These states include Arizona, California, New Mexico, Nevada and Washington. This requires proof by the spouses that the source of the income was separate property. This is not true in the other community property states.
Capital Gains from Separate Property. Generally, market appreciation in the value of separate property is also separate property. Accordingly, capital gain income may be separate property. This would require proof by the spouses that the property sold was separate property.
Distributions Deemed Separate Property Under Federal Law. Federal law deems some items separate property, including IRA withdrawals, railroad retirement benefits, U.S. savings bonds and ERISA funds. If these items appear on the return, they must be allocated to the spouse who owns them. This does not require any proof by the spouses, since these items are deemed separate property as a matter of law.
25.18.5.6 (03-04-2011)
Allocating Withholding and Estimated Tax Payments
Wage Withholding. Withholding credits from community property income are community property and are allocated 50% to each spouse. Treas. Reg. 1.31-1(a); Gilmore v. United States, 290 F.2d 942 (Ct. Cl. 1961), rev’d on other grounds, 372 U.S. 39 (1963). If it is established that the underlying wages are not community property, the withholding should be characterized consistently with the wages.
Estimated Tax Payments. Where spouses make estimated tax payments and subsequently file a joint return with an overpayment subject to a IRC 6402 offset, the estimated tax payments should be allocated in proportion to the spouses’ separate tax liabilities. The formula for this is as follows:
Spouse’s Separate Tax Liability ÷ Total of Spouses’ Separate Tax Liabilities × Total Estimated Tax Payments = Spouse’s Share of Payments
Rev. Rul. 80-7 , 1980-1 C.B. 296, amplified by Rev. Rul. 87-52 , 1987-1 C.B. 347, incorporating by reference then Treas. Reg. 1.6015(b)-1(b). This formula only applies as a presumption. Ownership of estimated tax payments in the context of a joint return is determined by their source. Elam v. United States, 112 F.3d 1036 (9th Cir. 1997); Gens v. United States, 673 F.2d 366 (Ct. Cl. 1981), cert. denied, 459 U.S. 906 (1982).
Therefore, if the spouses establish that the source of the payment was community property, the payment should be split evenly. If they establish that it is the separate property of one of the spouses, it should be allocated to that spouse.
25.18.5.7 (02-15-2005)
Items With Special Allocation Rules
Taxes and Credits. Some taxes and credits are allocated to spouses without regard to community property. These items are exceptions to the community property presumption and are not split. These include the earned income tax credit and self-employment tax.
Earned Income Tax Credit. Under IRC 32(c)(2)(B)(i) , the amount of earned income for purposes of the earned income tax credit is calculated without regard to community property laws. If only one spouse has earned income, the credit is allocated to that spouse. If, however, both spouses have earned income and are eligible for the credit, each spouse’s share must be determined. Rev. Rul. 80-7, 1980-1 C.B. 296, amplified byRev. Rul. 87-52, 1987-1 C.B. 347. Under IRC 32(b) , the credit is phased out as certain income levels are reached. Therefore, for purposes of determining each spouse’s contribution toward an overpayment, the credit cannot be allocated on a dollar-for-dollar basis. The allocated amount is arrived at by using the earned income tax credit tables to determine the hypothetical separate earned income tax credit that would have been available to each spouse if that spouse had filed a separate return (and if the earned income tax credit were available on a separate return) and then using the following formula:
Spouse’s Contribution to Earned Income Tax Credit = Spouse’s Hypothetical Separate Earned Income Tax Credit ÷ Sum of the Hypothetical Separate earned Income Tax Credits for Both Spouses × Joint Earned Income tax Credit (from joint return)
SeeRev. Rul. 87-52, 1987-1 C.B. 347. For purposes of determining the hypothetical separate credit, each spouse should use the same number of qualifying children as were used to determine the actual joint credit. In addition, because the earned income tax credit is determined without regard to community property laws, it cannot be characterized as community property for purposes of the allocation. This would mean that the injured spouse’s share of earned income tax credit would not be available for set-off, since it is the injured spouse’s separate property.
Self-Employment Tax. The self-employment tax with respect to self-employment income (net income from a trade or business, other than a partnership) is allocated to the spouse who has management and control over the trade or business. Treas. Reg. 1.1402(a)-8(a); Heidig v. Commissioner, T.C. Memo. 1986-411; Tolotti v. Commissioner, T.C. Memo. 1987-13. Management and control means actual management and control, not management and control imputed from husband to wife under community property laws. Treas. Reg. 1.1402(a)-8. Therefore, the self-employment tax is allocated to the spouse actually carrying on the trade or business. For purposes of the injured spouse calculation, self-employment tax should be allocated in accordance with this rule. Similarly, the self-employment tax attributable to a partnership that is a trade or business is allocated to the spouse who is the partner, even if part of the income is otherwise attributable to the other spouse for income tax purposes. Treas. Reg. 1.1402(a)-8(b).
25.18.5.8 (02-15-2005)
Determining How Much Can Be Offset
Generally. After an injured spouse claim is filed in a community property state, the Service must first determine each spouse’s community property share of the overpayment and any separate property. Rev. Rul. 85-70 , 1985-1 C.B. 361. This will usually be 50% of the overpayment.
Offsets for Debts Other Than Federal Taxes. As discussed previously, if the IRC 6402 debt is for a liability other than federal taxes, then the offset is limited to the liable spouse’s share of the community property portion of the overpayment and any part of the refund that is the liable spouse’s separate property. Oatman v. Secretary of the Treasury, 34 F.3d 787 (9th Cir. 1994). The Service follows this position in all community property states. Therefore, in offsets not involving federal tax debts, the Service will refund the injured spouse’s community property share of the overpayment and any part of the refund that is the injured spouse’s separate property.
Offsets for Federal Tax Debts. If the liability is for federal taxes, however, the amount allocable to the liable spouse’s share of the overpayment is the minimum amount that will be applied to the debt. If the applicable state law allows a creditor to reach an additional portion of community property to satisfy the separate liability of one of the spouses, the Service can exercise this right and claim a larger portion of the overpayment. Rev. Rul. 85-70, 1985-1 C.B. 361.
25.18.5.9 (03-04-2011)
State Law Remedies for Unpaid Federal Taxes
As discussed previously, some state community property laws allow private creditors to reach more than half of community property to satisfy the separate liability of one of the spouses. In the case of an offset for the separate federal tax debt of one of the spouses, the Service can rely on these state law remedies to offset more than half of the community property interest in an overpayment. These rules are complex and care must be taken in applying them, however. It is often necessary to know when the spouses were married. Because Service personnel working these claims often do not have this information, they should assume that the liabilities were incurred during marriage unless the taxpayer establishes otherwise. Here is a brief summary of the rules in each of the community property states. These rules are also summarized in Exhibit 25.18.5-1.
Arizona. Premarital tax debts may be satisfied from 100% of community property traceable to or contributed by the liable spouse and 50% of all other community property (i.e., 100% of the withholding attributable to the liable spouse and 50% of the withholding attributable to the nonliable spouse would be available). See Rev. Rul. 2004-71, 2004-30 I.R.B. 74; Ariz. Rev. Stat. § 25-215(B); Prater v. U.S., 268 F. Supp. 754 (D. Ariz. 1967); Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). If any portion of the overpayment is the separate property of the liable spouse, it may also be offset 100% to satisfy a premarital obligation. Post-marital tax debts may be satisfied from 100% of the community property portion of the overpayment. Ariz. Rev. Stat. § 25-215(A), (D); Hyde v. United States, 72 A.F.T.R.2d ¶ 93-5298 (D. Ariz. 1993). If any portion of the overpayment is the separate property of the liable spouse, it may be offset 100% to satisfy a post-marital obligation.
California, Idaho and Louisiana. Both premarital and post-marital tax debts may be satisfied from 100% of community property. Therefore, 100% of the community property portion of the overpayment should be offset. See Rev. Rul. 2004-72, 2004-30 I.R.B. 77. If any portion of the overpayment is the separate property of the liable spouse, it may also be offset 100%.
New Mexico, Nevada and Washington. Premarital tax debts may be satisfied from 50% of the community property portion of the overpayment. See Rev. Rul. 2004-73, 2004-30 I.R.B. 80. If any portion of the overpayment is the separate property of the liable spouse, it may be offset 100% to satisfy a premarital obligation. Post-marital tax debts may be satisfied from 100% of the community property portion of the overpayment. If any portion of the overpayment is the separate property of the liable spouse, it may also be offset 100% to satisfy a post-marital obligation.
Texas. All tax debts may be satisfied with 100% of the liable spouse’s sole management community property (i.e., any withholding attributable to the liable spouse’s wages) and 50% of the injured spouse’s sole management community property (i.e., any withholding attributable to the injured spouse) and 100% of any part of the overpayment that is attributable to the liable spouse’s separate property. See Rev. Rul. 2004-74, 2004-30 I.R.B. 84. If any portion of the overpayment is the separate property of the liable spouse, it may also be offset 100%. Also, 100% of any joint management community property (if any property can be characterized as such) would be available. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). This remedy applies to both pre- and post-marital federal tax obligations. For a discussion of what constitutes sole management and joint management community property, see IRM 25.18.4.4, Management and Control and Collection. For a discussion of the impact of characterizing property as sole or joint management on tax collection generally, see IRM 25.18.4.3, Levies Against a Nonliable Spouse to Reach a Liable Spouse’s Share of Community Property. For a more thorough discussion of processing injured spouse claims in Texas, see IRM 25.18.5.10, Injured Spouse Claims Involving Federal Tax Offsets in Texas.
Wisconsin. Wisconsin debts are classified based on whether they were incurred before or after the “determination date.” The determination date is the first day after all of the following have occurred: the marriage; January 1, 1986; and both spouses domiciling in Wisconsin. Predetermination date tax debts may be satisfied with 100% of the community property that would have been the liable spouse’s but for the community property law (i.e., any withholding attributable to the liable spouse’s wages) and 50% of other community property (i.e., any withholding attributable to the injured spouse) and 100% of any part of the overpayment that is the liable spouse’s separate property. Post-determination-date tax debts are classified differently, depending on whether they were incurred in the interest of the marriage and family (i.e., have a “family purpose”). See Rev. Rul. 2004-71, 2004-30 I.R.B. 74. Post-determination-date family purpose obligations may be satisfied from 100% of the community property portion of the overpayment. If any portion of the overpayment is the separate property of the liable spouse, it may also be offset 100% to satisfy a premarital obligation. See Rev. Rul. 2004-71, 2004-30 I.R.B. 74. If the obligation was incurred after the determination date, but not in the interest of the marriage and family, the obligation may only be satisfied from half of community property and 100% of any portion of the overpayment that is the separate property of the liable spouse. See Rev. Rul. 2004-71, 2004-30 I.R.B. 74. Most tax obligations have a family purpose. Hyde v. United States, 72 A.F.T.R.2d ¶ 93-5298 (D. Ariz. 1993). Wisconsin law presumes debts incurred after the determination date are family purpose.
25.18.5.10 (03-04-2011)
Injured Spouse Claims Involving Federal Tax Offsets in Texas
Because of complexities in Texas community property law, it is important to fully discuss handling injured spouse claims involving federal tax offsets in Texas.
Management Control Community Property in Texas. Under Texas law, there are two types of community property: Joint Management Community Property (JMCP) and Sole Management Community Property (SMCP). SMCP is property that a spouse is given the sole right to manage, control, or dispose of. SMCP is the property the spouse would have owned if single. Tex. Fam. Code Ann. § 3.102(a). The property includes, but is not limited to:
(i) Personal earnings
(ii) Revenue from separate property
(iii) Recoveries for personal injuries
(iv) Increase and mutations of, and the revenue from, all SMCP
A spouse can dispose of his or her SMCP without the consent or agreement of the other spouse. Massey v. Massey, 807 S.W. 2d 391 (Tex. Civ. App. – Houston 1991). Property held in a spouse’s name is presumed to be SMCP of that spouse. Third parties may rely on this presumption in dealing with the spouse, so long as the third party is not a party to a fraud being conducted, or does not have actual or constructive notice that the spouse lacks authority to deal with the property. Tex. Fam. Code Ann. § 3.104(b). JMCP is all community property which is not SMCP. The spouses are joint managers and may not represent each other in dealing with JMCP. Tex. Fam. Code Ann. § 3.102(b); Cooper v. Texas Gulf Industries, Inc., 513 S.W.2d 200 (Tex. 1974).
Separate Property in Texas. As in other community property states, Texas also recognizes the existence of separate property. This includes all property owned prior to marriage, property acquired during marriage by gift or inheritance, and the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage. Neither spouse has an interest in the other spouse’s separate property. Tex. Fam. Code Ann. § 3.001.
Creditors’ Remedies in Texas. Where one spouse owes a liability to a creditor, a private creditor can collect from all of the separate property of the liable spouse, all of the SMCP of the liable spouse, and all of the JMCP. Tex. Fam. Code Ann. § 3.202. In addition, with respect to a federal tax liability, the Service may also reach half of the SMCP of the nonliable spouse. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989). The Service cannot reach the separate property of the nonliable spouse, however. Unlike some other community property states, a creditor’s remedy in Texas is not affected by whether the liability was incurred before or during marriage.
Offsetting Refunds Under IRC 6402 in Texas. The tax collection principles cited in c., above, also apply in offsetting overpayments for tax debts under IRC 6402 in Texas. If there is a federal tax debt, the Service may offset 100% of any JMCP, 100% of any portion of an overpayment that is the liable spouse’s SMCP (i.e., any withholding attributable to the liable spouse’s wages) and 50% of the injured spouse’s SMCP (i.e., any withholding attributable to the injured spouse), and 100% of any part of the overpayment that is the liable spouse’s separate property. See Rev. Rul. 2004-74, 2004-30 I.R.B. 84. However, before an offset can be made, it is necessary to determine what portion of the overpayment can be characterized as separate property, JMCP, and SMCP.
Calculating the Liability of Each Spouse. The first step in determining how much of an overpayment can be offset is to determine the nonliable spouse’s share of the overpayment. To do this, each spouse’s separate tax liability must be calculated. If all of the items on the return are community property, then the tax on the return will simply be allocated 50% to each spouse. Otherwise, it may be necessary to allocate income and deductions between the spouses, determine each spouse’s separate tax, and go through the separate tax formula. See IRM 25.18.5.3 through IRM 25.18.5.5.
Applying the Credits. Once each spouse’s portion of the tax liability has been determined, then a determination must be made as to each spouse’s share of the tax credits. If all of the credits on the return are community property, then the credits on the return will simply be allocated 50% to each spouse. Otherwise, it may be necessary to allocate the credits between the spouses. See IRM 25.18.5.6, Allocating Withholding and Estimated Tax Payments.
Offsetting the Overpayments. Once the amount of each spouse’s overpayment has been determined, the amount that can be offset can also be determined. Note that in every case, the entire amount of the liable spouse’s overpayment can be offset. As discussed in IRM 25.18.5.8(2) , Determining How Much Can Be Offset, if the liability is a non-tax debt, then the nonliable spouse should receive the entire overpayment that is attributable to him or her. However, if the debt is a tax debt, then the Service can look to state law remedies to determine if any portion of the nonliable spouse’s overpayment can be offset. With respect to spouses residing in Texas, as discussed in d., above, the Service can offset any portion of the nonliable spouse’s overpayment that is attributable to the liable spouse’s SMCP or is JMCP. The Service cannot offset any portion of the nonliable spouse’s overpayment that is attributable to the nonliable spouse’s separate property. In addition, the Service should not offset more than half of the overpayment that is attributable to the nonliable spouse’s SMCP. While the Service can offset half of the nonliable spouse’s SMCP, this will already have been done in offsetting the liable spouse’s overpayment. Therefore, the Service should not offset the portion of the nonliable spouse’s refund that is his or her SMCP.
Characterizing the Refund Under Texas Law. Accordingly, the first step in this part of the process is to characterize the refund. To do this, it is necessary to first characterize the various credits that have been applied to the nonliable spouse’s side of the overpayment ledger before the payment of the taxes. As discussed above, generally, a spouse’s wages are considered to be his or her SMCP and therefore, any withholding attributable to a particular spouse’s wages should be considered his or her SMCP. Wynne v. United States, 306 F. Supp. 2d 660, 2004 U.S. Dist. LEXIS 3574, 93 A.F.T.R.2d 692, 2004-1 U.S.T.C. ¶ 50,184 (N.D. Tex. 2004). As discussed above, any earned income credit or estimated tax paid on a separate declaration is separate property. The presumption under Texas law is that items are JMCP, unless they are classified otherwise. Accordingly, the presumption with respect to other credits is that they are JMCP. The credits should be applied to the taxes in the same proportion as the overpayment. Gens v. United States, 673 F.2d 366 (Ct. Cl. 1981), cert. denied, 459 U.S. 906 (1982); Glaubke v. United States, 78-1 U.S.T.C. ¶ 9206, 41 A.F.T.R.2d 759 (E.D. Va. 1978). Thus, the total payments should be characterized and the overpayment should be considered to have the same character as the total payments. For example, assume that the nonliable spouse is entitled to credits totaling $1,000, her share of the tax is $900 and she is entitled to an overpayment of $100. Further assume the total credits include $100 of earned income credit, $600 of the nonliable spouse’s wage withholding, and $300 of the liable spouse’s withholding. The total payments are made up of 30% of the liable spouse’s SMCP, 10% of the nonliable spouse’s separate property, and 60% of the nonliable spouse’s SMCP. The overpayment would be applied to the tax in the same proportion as the payments. Thus, the $900 liability would be paid with $90 of the nonliable spouse’s earned income credit (10%), $270 of the liable spouse’s SMCP (30%), and $540 of the nonliable spouse’s SMCP (60%). The overpayment then would be made up of $30 SMCP of the liable spouse (30%), $10 separate property of the nonliable spouse (10%), and $60 SMCP of the nonliable spouse (60%). The Service could offset $30 of the overpayment, as it represents the liable spouse’s SMCP, and refund the remaining $70 (60%), as it represents the nonliable spouse’s separate property and SMCP. See also IRM 25.18.5.13(5) , Injured Spouse Examples.
25.18.5.11 (02-15-2005)
Multiple Obligations: Order of Application
Where there are liabilities for unpaid federal taxes and other liabilities described in IRC 6402, the offset should first be made against the federal tax liabilities. IRC 6402(e)(3); Treas. Reg. 301.6402-5(d)(1). If there is any amount left over after this application, it would then be applied to the other liabilities. The Service cannot offset more than 50% of a joint community property overpayment to satisfy a IRC 6402 liability involving child support, a debt to another federal agency, or a state income tax liability. If unpaid federal tax liabilities exceed 50% of the overpayment and there are other liabilities not involving federal taxes, the Service can only offset the overpayment to the extent of the federal tax debt. Any excess cannot be applied to the other obligations. This is because the Service will have already taken the maximum amount (50%) of the refund and applied it to the tax obligation. If the tax debt is less than 50% of the joint overpayment, then the Service can offset the full amount of the tax debt. In addition, the Service can offset the liable spouse’s other debt by the difference between the tax offset and 50% of the overpayment. In this case, the remaining 50% of the joint overpayment must be refunded to the injured spouse. The priority of offset between IRC 6402 obligations after federal taxes is as follows: past due child support; debts owed to federal agencies; and state income tax obligations. IRC 6402(e)(3). Priority between multiple debts owed to federal agencies is determined by the order in which the debts accrued. IRC 6402(d)(2).
25.18.5.12 (02-15-2005)
Offsets Without a Joint Return
The Service may legally offset a spouse’s overpayment to satisfy an unpaid tax liability of the other spouse, even though the overpayment was reported on a separate return. Eaves v. United States, 433 F.2d 1296 (10th Cir. 1970). These types of offsets are not covered by IRC 6402. This is permissible as being similar to a levy or offset on community property. Assuming that the nonliable spouse who filed the return reported his or her portion of the community income correctly, an offset is only permissible to the extent that state law allows creditors to go against the nonliable spouse’s half of community property for an obligation of the liable spouse. This is because in filing a separate return, the spouse who is not liable has already made the allocation, and the reported overpayment would represent his or her share of the overpayment. The examiner should verify that the income was reported properly under community property principles.
25.18.5.13 (03-04-2011)
Injured Spouse Examples
Debts Not Involving Federal Taxes
Husband and wife are married and domicile in Louisiana. Husband owes $25,000 for an unpaid federal student loan from before his marriage. For 2000, husband and wife file a joint return. Husband earned $40,000 in wages and had withholding of $4,000. Wife earned $50,000 and had withholding of $8,000. They report a tax liability of $9,000 and a refund of $3,000. The Service offsets the entire refund. Wife files an injured spouse claim.
The Service should refund $1,500 (half of the overpayment), calculated as follows:
Husband Wife
Husband’s wages $20,000.00 $20,000.00
Wife’s wages 25,000.00 25,000.00
Tax $ 4,500.00 $ 4,500.00
Less:
Husband’s withholding $ 2,000.00 $ 2,000.00
Wife’s withholding 4,000.00 4,000.00
Overpayment $ 1,500.00 $ 1,500.00
Earned Income Tax Credit Allocation
Husband and wife are married and domicile in Wisconsin. Husband owes back child support of $17,000 from a previous marriage. For 2000, husband has wages of $8,000 and withholding of $900. Wife has wages of $13,000 and withholding of $600. They have two dependent children who lived with them. They file a joint return and report an earned income credit of $2,133 and a tax liability of $366. They report an overpayment of $3,267. The entire amount is offset by the Service for the child support claim. If wife files an injured spouse claim, the Service should refund $1,727 her, calculated as follows:
(i) Allocation of Earned Income Credit
Wife’s earned income $13,000
Husband’s earned income $ 8,000
Wife’s hypothetical earned income credit (from EIC table) $3,817
Husband’s hypothetical earned income credit (from EIC table) $3,210
Wife’s share of earned income credit = $3,817/$7,027 X $2,133 = $1,158
(ii) Allocation of Taxes and Credits
Wife’s Husband’s
Wife’s wages $ 6,500.00 $ 6,500.00
Husband’s wages 4,000.00 4,000.00
Tax $ 183.00 $ 183.00
Wife’s withholding 300.00 300.00
Husband’s withholding 450.00 450.00
Earned Income Credit 1,158.00 975.00
Overpayment $ 1,725.00 $ 1,542.00
Federal Tax Claims and Common Law Right of Offset.
Husband and wife live in California. Husband owes $18,000 in employment taxes from 1998, before the marriage. For 2000, husband and wife file a joint return. Husband earned $50,000 in wages and had withholding of $8,000. Wife earned $35,000 and had withholding of $7,000. They file a joint return and report a tax liability of $14,481 and a refund of $519. The Service offsets the entire refund. Wife files an injured spouse claim. The injured spouse claim should be denied. Although based on the facts submitted, wife has a half-interest in the overpayment since it is entirely community property, under California law a private creditor may attach both halves of community property to satisfy a premarital debt of one of the spouses. Accordingly, the Service can offset the entire refund of $519.
Order of Application
Husband and wife live in California. Husband owes $1,500 in premarital taxes and $3,000 for child support from a previous marriage. All items reported on the return are community property. For 2000, husband received wages of $35,000 and had withholding of $6,000. Wife received wages of $13,000 and had withholding of $3,000. They file a joint return and report a joint tax liability of $5,261 and an overpayment of $3,739. If the Service offsets the entire overpayment and wife files an injured spouse claim, wife should receive a refund of $1,869.50 and the overpayment should be applied as follows:
(i) Allocation of Taxes and Credits
Husband Wife
Husband’s wages $ 17,500.00 $ 17,500.00
Wife’s wages 6,500.00 6,500.00
Tax $ 2,630.50 $ 2,630.50
Less:
Husband’s withholding $ 3,000.00 $ 3,000.00
Wife’s withholding 1,500.00 1,500.00
Overpayment $ 1,869.50 $ 1,869.50
(ii) Application of Offset to Overpayment
Amount applied to full-pay federal tax debt $ 1,500.00
Remaining amount applied to past due child support 369.50
Total overpayment offset $ 1,869.50
Offsetting Refunds in Texas to Apply to Federal Income Tax Liabilities.
Husband and wife are married and domicile in Texas. Husband owes a separate tax liability from a prior year of $12,000. Husband and wife file a joint federal income tax return for 2006. The return reports a total tax liability of $7,923 and a total overpayment of $487. Husband received wages of $65,305, with $7,906 withheld for income taxes. Wife received wages of $9,262, with $464 withheld for income taxes. Husband received a premature withdrawal from an IRA in the amount of $120, incurring a tax under IRC 72(t) of $12 (which is included in the income tax liability). The spouses claimed the standard deduction. They also claimed two exemptions on the return. In addition, they claimed a telephone excise tax refund of $40.
The first step is to calculate each spouse’s separate tax liability. This would be done as follows:
Item Character Amount Allocated to Husband Amount Allocated to Wife
Husband’s wages Husband’s SMCP $32,652.50 $32,652.50
Wife’s wage’s Wife’s SMCP 4,631.00 4,631.00
IRA income Husband’s separate property 120.00
Standard deduction 5,150.00 5,150.00
Exemptions 1 1
Separate income tax liability $3,965.53 $3,947.53
Note:
Note that the additional tax under IRC 72(t) is not included in the income tax calculation at this point. It is husband’s separate liability and will be added back to his income tax liability after his income tax liability is calculated under the separate tax formula.
Next the separate tax formula should be applied as follows:
$3,947.53/$7,913.06 X $7,911.00 = $3,946.50 (wife’s share of the joint liability)
$3,965.53/$7,913.06 X $7,911.00 = $3,964.50 (husband’s share of the joint liability)
Therefore, each spouse’s share of the income tax liability would be as follows:
Husband Wife
Income tax liability $3,964.50 $3,953.00
IRC 72 tax 12.00
Tax liability $3,976.50 $3,946.50
Note:
Note that because the IRA account and withdrawal is husband’s separate property under federal law, the $12 IRC 72(t) additional tax is now added back to husband’s income tax liability.
Next the payments should be characterized and applied as follows:
Item Character Husband Wife
Husband’s withholding Husband’s SMCP $3,953.00 $3,953.00
Wife’s withholding Wife’s SMCP 232.00 232.00
Tel. excise tax refund JMCP 20.00 20.00
Total $4,205.00 $4,205.00
Less tax liability 3,976.50 3,946.50
Overpayment $ 228.50 $ 258.50
The entire portion that represents husband’s overpayment can be offset. The next issue is to determine how much of wife’s overpayment can be offset. Under Texas law, the Service can offset 100% of the portion of the refund that is husband’s SMCP and any portion that is JMCP. In addition, the Service can offset 50% of the portion that is wife’s SMCP, which it has already done by offsetting all of husband’s refund. The Service cannot offset any part of the refund that is wife’s separate property. Therefore, the Service can offset any portion of wife’s refund that is either JMCP or husband’s SMCP. If we assume that the tax payments were applied proportionately to the tax liability, the amount of the refund that is JMCP or husband’s SMCP would be calculated as follows:
Wife’s overpayment X Wife’s half of husband’s SMCP payment + Wife’s half of JMCP payment ÷ Wife’s total payments = Amount of wife’s over-payment that can be offset
or
$258.50 X ($3,953 + $20)/$4,205) = $244.24
Consequently the amount wife can retain is equal to her portion of her overpayment minus the amount that can be offset.
or
$258.50 – $244.24 = $14.26
Exhibit 25.18.5-1
Amount of Overpayment That Can Be Offset To Satisfy an IRC 6402 Debt
Type of IRC 6402 Debt Arizona California Idaho Louisiana Nevada
Non Federal Tax Debt, including Child support State income tax Debt to other federal agency 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse.
Federal tax debts incurred before marriage 100% of the refund that is community property traceable to or contributed by the liable spouse, and 50% of any part of the refund that represents other community property, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 50% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse.
Federal tax debts: Incurred after marriage Assuming it is an obligation incurred to benefit the community, 100% of the community property portion of the overpayment and all of the portion that is the separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse.
Type of IRC 6402 Debt Continuation New Mexico Texas Washington Wisconsin*
Non Federal Tax Debt, including Child support State income tax Debt to other federal agency 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the community property portion of the refund plus any separate property interest of the liable spouse. 50% of the marital (community) property portion of the refund plus any individual property interest of the liable spouse.
Federal tax debts incurred before marriage 50% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the liable spouse’s sole management community property (e.g., any withholding attributable to the liable spouse’s wages) and 50% of the injured spouse’s sole management community property (e.g., any withholding attributable to the injured spouse) and 100% of any part of the refund that is attributable to the liable spouse’s separate property. 100% of any joint management property (if any can be so characterized) would also be available. 50% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. Predetermination date tax debts may be satisfied from 100% of the marital (community) property portion of the refund that would have been the liable spouse’s but for the Marital Property Act (i.e., 100% of the portion of the refund attributable to any withholding from the liable spouse’s wages) and 50% of other marital (community) property (i.e., 50% of the portion of the refund attributable to the injured spouse’s wages) and 100% of any part of the refund that is attributable to the liable spouse’s individual (separate) property.
Federal tax debts: Incurred after marriage 100% of the community property portion of the refund, plus all of the refund that is separate property of the liable spouse. 100% of the liable spouse’s sole management community property (e.g., any withholding attributable to the liable spouse’s wages) and 50% of the injured spouse’s sole management community property (e.g., any withholding attributable to the injured spouse) and 100% of any part of the refund that is attributable to the liable spouse’s separate property. 100% of any joint management property (if any can be so characterized) would also be available. Assuming there was an intent to benefit the community by incurring the debt, 100% of the portion of the refund that is community property and all of the refund that is separate property of liable spouse. If there was no such intent, 50% of the community property portion of the refund and all of the refund that is the separate property of the liable spouse. With respect to post-determination date obligations, assuming the obligation is incurred in the interest of the marriage and family, 100% of the marital (community) property part of the refund and all of the refund that is individual (separate) property of the liable spouse. If the obligation is not incurred in the interest of the marriage and family, 50% of the marital (community) property portion of the refund and all of the refund that is the individual (separate) property of the liable spouse.
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