We routinely represent taxpayers in IRS civil tax cases located in Memphis and Jackson Tennessee, North Mississippi, and West Memphis Arkansas. I have worked with several clients regarding this matter and thought it would be good to share some information regarding this topic. The short answer is a resounding yes!
Before going into more detail, I will provide a refresher as to what an IRS offer in compromise (OIC) does for a taxpayer's outstanding tax debt. An OIC allows a taxpayer to settle their outstanding tax debt for a fraction of the total balance. The IRS performs a calculation to determine if the taxpayer can repay the entire outstanding debt over a certain period. If it is determined that the taxpayer can pay the debt in full, the IRS will not allow for an offer in compromise to be used and the taxpayer will have to set up a payment plan. However, if it is determined the taxpayer cannot pay the full debt the IRS will allow for a negotiated lower amount based on a formula that takes into account the taxpayer's income and allowable expenses determining the disposable income that can be used in an OIC offer. The application, supporting documents, and calculations can be quite complex. As such, I would recommend you reach out to a tax attorney to assist throughout the process.
Back to the question at hand. Yes, a spouse or ex-spouse can and should submit a separate offer in compromise individually from their spouse if applicable. The first step is to determine which tax liabilities are separate and which are joint. For instance, if the tax debt was obtained before marriage that would be an example of a separate tax liability that only one spouse is responsible to pay. An example of a joint tax debt would be tax debt that married individuals obtained during the marriage. These examples are oversimplifications and there are numerous caveats that a tax attorney can help you navigate. For example, if one of the spouses owns a business, that adds another layer of analysis and the potential need for a third OIC for the business that might be the cause for the tax issues to begin with. One way to obtain a full accounting of the tax liability is to pull tax transcripts on each of the spouses.
The next complication is properly attributing the income and expenses to the appropriate spouse. The reason you want to allocate income between spouses in a separate offer in compromise situation is so that you can properly allocate your share of expenses to place on your OIC. Remember, the IRS is trying to determine if you can fully repay the debt. You could be setting yourself up for trouble if you include more expenses then legally allowed. This is important in working to ensure the offer is accepted by the IRS. Nationally, only about 40 percent of offers are accepted. One way to increase the likelihood of an accepted offer is to use a tax professional familiar with the process.