Impact of Federal Tax Liens on the Division of Property in Marital Dissolutions

A divorce is usually stressful enough without the added concern of obligations to the IRS. Unfortunately, many couples must deal with an IRS obligation as part of dissolving their marriage. The family law court may designate who is ultimately responsible between the parties to pay the debt. But, it cannot stop the IRS from pursuing both spouses, if both were originally liable for the debt. A court order designating that only one spouse is responsible for the taxes simply gives the non responsible spouse the right to seek reimbursement from the responsible spouse for any taxes paid.

The non responsible spouse may ask the IRS to find him or her to be an “innocent spouse,” and therefore not liable for the tax obligation, but that is a separate procedure involving negotiations with the IRS, not something the family law court can decide. Please review our previous article on innocent spouse relief for more information.

Even if a spouse was never originally liable for the taxes or has been relieved of the liability as an innocent spouse, he or she must still be concerned about the impact of a Notice of Federal Tax Lien against their spouse. The lien will encumber the liable spouse’s interest in his or her non marital property and marital property. The parties must take these liens into account when negotiating a property division. A court order awarding property from one spouse to another does not eliminate the tax lien.

The lien is even more treacherous when the non liable spouse does not know about the obligation and, at the time the petition for dissolution is filed, there is no Notice of Federal Tax Lien filed with the county or the state. The parties may negotiate or the court may be ready to order a division of property that grants the liable spouse’s property to the non liable spouse, completely unaware that the IRS is about to file a Notice of Federal Tax Lien. If the IRS files its Notice of Federal Tax Lien before the order granting the transfer, it could encumber the liable spouse’s interest in property and possibly destroy the value of the property to the non liable spouse. The non liable spouse may not learn of this problem until months or years after the dissolution is final and long after there is anything practical that the court can do about it.

Some taxpayers have argued that Minnesota Statutes Section 518.54, Subd. 5, protects marital assets from a creditor like the IRS who files a federal tax lien after the petition for marital dissolution is filed. The argument is that the marital interest in property vests in the spouse as of the date the petition for divorce is filed. See Gardner v. United States, 34 F.3d 985 (10th Cir. 1994) (interpreting a Kansas statute similar to Minnesota’s statute). Therefore, if the IRS files its lien after the petition is filed, it is too late to encumber the property. This allows the family law court to make an allocation of assets from the marital estate without having to worry about what transpires between the date the petition is filed and the date of the final order.

Minnesota courts have not followed Gardner in applying this statute in areas beyond marital dissolution. The Minnesota statute was simply meant to clarify that divisions of marital property are not taxable events. No Minnesota court has applied the statute to change property ownership in a way that will affect claims by the spouses’ creditors. See In re Johnson, 210 B.R. 153 (1997).

To avoid problems with undisclosed or unknown tax obligations and tax liens, the parties to a marital dissolution should ask the IRS for an account transcript showing the status of their tax obligations. They can obtain this transcript by filing a Form 4506-T and requesting account transcripts for all relevant years. If either spouse owns or has owned a business, the parties may need to investigate further to obtain a clear picture of all of the existing or potential obligations.