Practical Application of the Law:
While filing taxes as married- separate rather than jointly can effectively solve the problem in some states, it will not reduce spousal liability in a community law state, such as California. California is 100% spousal liability, meaning that any and all liability that your spouse might owe, can and will be collected from you. This includes bank accounts/bank levies, for which either you or your spouse are listed (it does not need to be both), wage garnishments (EWO), and liens (which apply automatically to your spouse’s credit, but will also be applied to any property where your spouse is listed on the deed). While a lien does not allow an agency to sell your primary residence, it does allow them a controlling interest in all refinancing or selling that you would like to do on the property. There are no such protections on other properties, not used as a primary residence. Short of life-altering decisions (e.g. moving to another state or remaining single/divorce) there is little you can do to prevent this, when living in a community law state.
But hope is not lost completely.
My previous post discussed separate property and some ways to establish it, in case of divorce. Similarly separate property is a good way to make sure you and your spouse are secure in your future, if you know that one of you owns a business or is in some other way, more susceptible to incurring liability.
Depending on the type of liability there may be some steps you can take. One solution, is incorporating. If the debt is a business one, it is much more difficult to be held personally liable if you conducted business under a corporation or LLC. This limits the risk of you being held personally liable, but contrary to popular belief, does not eliminate it. The main concern for a corporate officer is a dual determination which is historically hard to prove and is therefore, a last resort. Dual determinations are rarely done unless the party owes a significant debt, which would make it cost-effective. (In my experience this would be considered for balances over $25,000 in some cases, but typically $50,000 and up). The other issue to overcome for agencies attempting to pursue a dual determination is the statute of limitations to complete it, which is 3 years from the determination date.
One that we have probably all heard of is over-seas, or out of state assets. This is generally true but the scope of what is considered “out of reach” depends on the jurisdiction of the agency. (i.e. state liability cannot touch assets located out of state or out of state income/employer who does not have nexus (presence in that state). It is still possible with a referral from the Attorney General, etc. but again, due to the time/work needed to meet all the requirements, it is not common that one would be pursued unless the recovery is huge.
If you have a pre-marital agreement opting out of the community property of the spouse which you entered into before the tax liability was incurred (or could reasonably be anticipated), then your non-liable spouse’s property would be considered separate and unreachable. However, since the collecting agency may be unaware of the pre-marital agreement, they would proceed with enforcement against your spouse, leaving you with the task of proving, after the fact, that the levied assets are not community property.
Another fact to take into consideration is that a levy against your wages, also know as an EWO or Wage Garnishment, is typically continuous; that is, one levy against your wages will continue to take the non-exempt portion of your wages until the liability is paid or you get them to stop the levy. However a levy against your non-liable spouse, however, is not continuous. This means that a new levy would need to be issued each time it wishes to take your non-liable spouse’s wages, and since it can take months with all the legal procedures that must be adhered to, this gives you ample plan to act/react accordingly.
There are also some cases, such as a debt which was incurred prior to marriage, which can be appealed through various programs (e.g. Innocent Spouse appeal) offered by the collecting agency which they are required to inform you of, if you request that information.
**This is not intended for advice purposes. Reader assumes 100% liability in the application/use of any information herein.