The injured spouse rule.

Ataxpayer's refund can be used to pay all or part of his or her spouse's past-due income taxes, other federal debts or arrears for child or spousal support payments.

The spouse not obligated for the debt may be considered an injured spouse under Internal Revenue Code section 6402 and can obtain the refund that would otherwise be used to pay these past-due amounts.

To be considered an injured spouse, a taxpayer must

* Have filed a joint tax return with the spouse owing the debt.

* Have reported income, such as wages and interest.

* Have made tax payments, such as withholding or estimated tax payments.

* Be due a refund, all or part of which was or is expected to be applied to a past-due child support or federal agency debt owed by the other spouse.

According to revenue ruling 85-70 (1985-I CB 361), when a husband and wife file a joint income tax return, each spouse has a separate interest in the jointly reported income as well as a separate interest in any overpayment. To determine his or her share of the refund, the nonobligated spouse must subtract the share of the joint income tax liability from the contribution.

For example, assume husband and wife file a joint income tax return showing a liability of $13,004. The husband had $2,000 withheld from his wages and the wife $6,000. They also paid $8,000 in estimated tax payments. The refund due the couple is $2,996 ($16,000-$13,004), but the wife is delinquent in child support payments from a previous marriage.

To obtain his refund, the injured husband must use the following formula to determine how much of joint estimated tax payments and payments made with joint returns are considered paid by each spouse.

1. Divide the nonobligated spouse's separate tax by both spouses' separate taxes.

2. Multiply this result by the estimated tax payments.

If our husband and wife had filed separate returns assume her tax liability would have been $10,302, and his $3,334. His portion of the estimated tax payment is assumed to be $3,334/($10,302 + $3,334) X $8,000 = $1,956.

Thus, the injured spouse's total contribution is $3,956 ($2,000 in actual withholding plus $1,956 in estimated tax payments).

Using the formula again, the husband's assumed share of the joint tax liability is $3,334/($10,302 + $3,334) X $13,004 = $3,179. Therefore, the nonobligated husband is entitled a refund of $777 ($3,956 paid less $3,179 owed). The rest of the refund is available to pay the wife's delinquent child support obligation.

Observation: Refunds that involve community property states must be divided according to law. If you are a CPA practicing in California, Idaho, Louisiana and Texas be aware that all community property is subject to the debts of either spouse and that your client's entire refund on a joint return can be used to offset a spouse's prior debt.