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Tax-sharing agreements not binding upon the IRS

There is much that Michigan taxpayers need to consider before entering tax-sharing agreements with other parties. Most importantly, these sorts of agreements are not binding upon the IRS.

For example, the IRS recently disallowed a number of rental property loss deductions claimed upon the joint income tax return of two former spouses prior to filing for divorce. In other words, the IRS now said they owed more money. Also, as a part of their divorce, the two parties agreed that each spouse would be liable for 50 percent of any taxes owed. However, the IRS did not agree with such a computation and came up with a separate formula regarding the liability of each party.

This matter ultimately ended in tax court, and the court sided with the IRS. The court ruled that the divorce agreement established the couple’s rights under state law. However, as we already noted, such an agreement was not enforceable against the IRS.

While divorce agreements can address allocations regarding the handling of debt, the terms of the agreement are not binding upon creditors. Thus the court decided to abide by the IRS determination regarding the dividing of tax debt. In making its decision, the court was merely following precedent, legislative committee notes, case law, and reports from the Department of Treasury.

Again, a tax-sharing agreement is not binding upon the IRS if the IRS does not enter into that agreement. Therefore, before entering any such agreements, it may be helpful to speak to a seasoned tax attorney to apprise you of all of your legal options. No one wishes to receive an unexpected (and unpleasant) surprise from the IRS regarding just how much they owe in taxes.

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