How community property laws apply to an Offer In Compromise
(OIC)
During an Offer in Compromise investigation,
a situation that comes up
quite often is when one spouse in a marriage
is when one
spouse is liablefor a tax debt and
the other spouse is not. How the income and expenses are shown on Form 433-A (OIC) depends whether or not if
the tax debtor lives in a community
property state.
The community
property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and
Wisconsin. In a community property state generally the income and assets of the non-liable spouse are subject
to collection of the liable spouses tax debt. An exception exits for separate property. Some examples of
separate property would be gifts, inheritances and property acquired before marriage.
Be careful
though. Separate property may become community property if it is commingled. Generally wages and
self-employment income are considered community property absent written agreement such as a pre-nuptial
agreement. In California I have seen a “transmutation agreement” that was drafted by an attorney work to
separate income for IRS tax settlement purposes. These are generalizations. Property law varies from state to
state and competent legal advice should be obtained if you have any questions.
In a non community property state you should work the
income and expense calculation on Form 433-A (OIC) using both incomes and all expenses and also try it
using only the liable spouse income and expenses. You can prorate the expenses as a percentage of income if you
wish. See example 9 on the next
page. If both spouses were liable for the tax then
both of their income and expenses would be used in the Offer in Compromise
calculation.
next page
| 