INNOCENT SPOUSE RELIEF

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January 3, 2012 by msquaredlaw

I had no idea my spouse lied on our joint return.   Now the IRS is after me for tax, interest and penalties.   I am liable??  Is there anything I can do??

Are you concerned about your personal liability for the taxes due on a joint income tax return that you filed with your spouse or ex-spouse?   Did your spouse or former spouse incorrectly report income, completely omit income or claim improper deductions on your joint return without your knowledge? Perhaps we can help!

Joint and Individual Liability for Tax on Joint Return.

When a married couple files a joint return, each spouse is jointly and individually liable for the full amount of tax resulting from the joint return, including any tax deficiency, interest and penalties that the IRS assesses after an audit.  This means that the IRS can come after either spouse to collect the entire tax and related interest and penalties, not just the portion attributable to that spouse’s income.  This is also true even if the couple later divorces and even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.  This can sometimes lead to unfair results.  However, there may be hope found in the form of three provisions in the law that alleviate the harshness of this rule.

Spouse (or Ex-Spouse) Tax Relief Options.

One.  Relief for Innocent Spouses.

An “innocent spouse” can elect to seek relief from liability for a tax understatement attributable to the other spouse’s erroneous tax items, such as unreported income or disallowed deductions. To qualify, you must show that you didn’t know about the understatement and that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you are still married and living with your spouse.

Two.  Separation of Liability.

In some cases, a spouse can elect to limit liability for any deficiency on the joint return to the portion of the deficiency allocated to that spouse. The election can be made only if the spouses are no longer married (divorced or widowed), are legally separated, or lived apart for the 12 months before the election was made.

If you make the election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you had filed separate returns. For example, you will generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items to the extent that the IRS proves that you actually knew about those items when you signed the return, unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you for the purpose of avoiding paying the tax.

Three.  Equitable Relief from Liability.

In some cases, another type of relief, termed equitable relief, may apply to situations where there is a deficiency, but the spouse doesn’t qualify for relief under either of the first two provisions.  This will require analysis of various factors and relief is granted on a case-by-case basis.

All the relief provisions discussed thus far apply to situations in which a deficiency arises after a return has been filed.  However, equitable relief may also be available when the joint return appears to be filed correctly and no income was omitted, but the tax as shown on the return has not been paid through no fault of the spouse applying for the relief.  To qualify for the relief from liability for this unpaid tax, you must show that when the return was filed, you didn’t know and had no reason to know that the tax wouldn’t be paid, and that it was reasonable for you to have believed that the tax was paid by your spouse.

Electing Relief.

In order to obtain relief under any of the above provisions, you must make a election on IRS Form 8857 and attach a statement to the return describing why you qualify for relief.  However, beware! You only have a limited amount of time to make the elections for innocent spouse relief and separation of liability.  The deadline is up to two years after IRS begins trying to collect the tax from you.  However, in the case of equitable relief, the IRS has announced that it will no longer require individuals to submit a request for equitable relief within the two year period.

Whether, and to what extent, you can take advantage of the above relief provisions depends on your own particular facts and circumstances and may involve a complex analysis of factors.

If you would like to discuss whether these provisions apply in your individual situation or have us request relief for you, please contact us.

Muiños & Morales

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