Your Tax Debt Might Trump a Court Judgment

By: Sarah Nieschalk | June 15, 2016 (Edited July 7, 2017)

Close-up of a judge handing down a verdict

Generally speaking, you would expect that any decision handed down as part of a legal judgment or settlement applies to everything on paper. After all, receiving defined parameters regarding your responsibilities following a bankruptcy or divorce is essential to staying on track. But there is one area notoriously immune to court judgments: federal tax.

Unfortunately, you can't assume that even a legal document will protect you from the wrath of the IRS in cases of unpaid debts. Further, you should always double-check the details of any court decision to see to what extent they apply to your delinquent liability. Failing to perform your due diligence can lead to disappointment and, ultimately, IRS collection action.

Bankruptcy

Bankruptcy may result in your tax debt being discharged. However, this is not always the case. Tax debt is only discharged if particular circumstances are met. Regardless of the bankruptcy chapter you file, you may still be liable for a delinquent tax balance. You should consult with a tax professional before assuming one way or the other and be prepared to make arrangements to satisfy your IRS balance, if applicable.

Divorce

Suffering the stress of a divorce is bad enough, but misunderstanding your tax obligations will make it far worse. In many cases, even if a judge determines that your former spouse is responsible for paying a tax debt, the IRS may see it differently. If you do receive notice requesting payment, don't expect that your local court judgment will grant you a reprieve. Alternatively, if the debt was in fact created by your spouse without your knowledge or participation - and you can prove this - you can make an Innocent Spouse request. If the IRS accepts this, you will not be held liable for the debt.

Court Awards

There's a chance that, at some point, you'll receive compensation following a lawsuit or legal settlement. If you do, don't make the mistake of counting all of your award funds too soon. Although the judge, mediator or even your attorney won't expressly explain this, you'll be required to pay a certain amount of tax from your payment. The exact circumstances can vary, depending on the type of award you receive, so definitely consult with a licensed tax professional to understand your reporting requirements.

Judgments, in General

Regardless of your legal circumstances and the resulting outcome, don't make the fatal error of forgetting about Uncle Sam. When in doubt, assume that your tax obligations will supersede court judgments - at least until you confirm one way or the other. Also, you may not want to handle the issue on your own.

You may be surprised to learn that most tax resolution companies will provide you with a consultation at no cost. Included in this consult is a review of any outstanding tax issues and what you can expect from the IRS. Once you understand the full scope of your tax duties as they relate to your court's decision, you can make a decisive step in the right direction.

 

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Written by Sarah Nieschalk

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