Don’t Lose Your Tax Refund Because of Your Spouse’s Debt
“Injured Spouse” is an IRS term for the husband or wife who is forced to watch a tax refund fly out the window instead of into the bank because of debts or taxes owed by the other spouse.
The IRS and many state tax agencies have a habit of taking tax refunds to satisfy other debts, and if your filing status is married-filing joint, your well-earned income tax refund may be in jeopardy if you married someone who:
1. Owes back child support,
2. Is delinquent on student loan payments or other federal agency debts,
3. State income tax liabilities,
4. Repayment of 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, you can contact the FMS at 1-800-304-3107 or TDD 1-866-297-0157.
If you feel your tax refund is mostly your money, it would be unfair (even if you live in a community property state) for the funds to be applied to a debt that isn’t yours. What to do? First of all, you may want to change the exemptions you claim on your form W4 on file with your employer so that you will have a break-even 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. This can result in 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. While this may not be beneficial for maximizing the refund you could receive, there are 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.
Right now, you may be looking at a refund situation for 2010 or prior years and wonder how you can guard your refund against the tax man. Well, there is help!
File form 8379 Injured Spouse Allocation with your tax return. Part 1 contains a series of questions that qualify you for using the form and 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 the IRS processes 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.
If you’ve already filed your income tax return, you may file Form 8379 separately. Mail it to the IRS service center where you filed your original return. It takes approximately eight weeks for the IRS to process the separately filed form. And it may be too late to apply it to this year’s income tax refund. Do it anyway. And every year you file, be sure to include a new Form 8379 if you are expecting a refund.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.