If you are married, should you always file your tax returns jointly with your spouse? Most people will answer yes because they think that’s the best way minimize your tax bill. Often, times the that is the right answer – because married filing jointly gets you the most favorable tax rates.
But, should lower tax rates be your only criteria? NO! with a capital N and a capital O.
I say this because of the following three words “joint & several liability.” Joint liability means you and your spouse are both liable; several liability means you're each liable for the entire amount not just your own share.In other words, if you file a joint return and the information is false or wrong, the IRS can go after either of you because you both signed the return.
This typically happens when one spouse knows more about the couple’s finances and files the tax return. Often, the other spouse simply signs the return without really understanding what’s in it.
To make this come alive, let me tell you the story of Jack and Jill. Jack and Jill are married and file their tax returns jointly. Jack owns his business and doesn’t report all his income on their tax returns. A few years later they are audited by the IRS and it is determined that they owe an additional $100,000 of taxes plus interest and penalties.
Who do you think the IRS will go after to collect on Jack’s tax bill? (a) Jack? (b) Jill? (c) Anyone they can? If you picked answer ©, you are correct, even if they are now divorced.
Jill can’t believe that she is liable for the taxes on the income her husband under-reported. But she is – unless she qualifies as an innocent spouse or under the equitable relief rules as defined by the IRS. Not everyone qualifies, so never assume you would be. Instead, before you sign on the dotted line make sure the numbers on the return make sense; if not – ask questions. Bottom line – don’t be a victim. Protect Yourself.