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What Happens When One Person Gets a Tax Bill But Three People Owe It?

Written by Steve Rhode

Question:

Dear Steve,

I might face unexpected taxes on income which will be assigned to me 100%. Three additional persons say they will share the debt with me in case this happens as they feel responsibility for this possibility.

Would you happen to know if it is possible to secure sharing a possible upcoming tax debt (unknown value) for ONE person, among THREE additional persons through a promissory note or similar? Of course it would have to be some sort of agreement between the individuals where the person having a tax debt pay 100% of the debt to the IRS and the additional three persons pay directly to the person with the debt.

Looking forward to your comments, thanks for a great site.

Regards,

Thomas

Answer:

Dear Thomas,

You stumped me so I reached out to tax expert Jim Buttonow. Jim said:

“An interesting predicament. A somewhat similar scenario occurs often with married taxpayers who get a divorce when the both jointly owed the IRS.

First rule: the IRS will collect on who is assessed and owes the tax – that is, if you report all of the income and all of the tax, you are liable for the tax. If the tax is not paid with the return, the IRS will only pursue the taxpayer that has the outstanding debt.
Second rule: an outside legal agreement will not change the IRS from collecting on you. The IRS does not care about outside legal agreements that make others liable for the tax. Often, in legal settlements pursuant to a divorce, one person can be liable in the divorce settlement to pay all of the unpaid taxes. Moral of the story: the IRS does not care because the taxpayers, who filed a joint return, will hold each taxpayer jointly liable- they cannot sever themselves from the liability.

One final option to consider is to not “owe the tax” – which would be to “nominate” the income to the other persons. I don’t know the specific facts related to the income source, but if you are the “nominee recipient” – that is, you receive a Form 1099 for the income – you can nominate the amounts that are allocable to the other parties by filing a Form 1099 with the IRS that lists you as the payer and the other persons as the recipient. The other persons would be able to declare their allocable income on their return. See this information.”

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Of course as you suggested, there is nothing that would prevent the other parties from compensating you for taxes due.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.





About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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