Separated and divorced taxpayers who have filed joint returns may need innocent spouse relief so they are not held liable by the IRS for their exe’s failure to report taxable income or disallowed tax deductions. Joint liability is a risk that many taxpayers don’t recognize until it’s too late. Innocent spouse relief is one of the most frequently litigated issues in Tax Court, because the legal requirements are complex and detailed. Chapter 11 of my book contains an excellent discussion of innocent spouse relief and the related concepts, separation of liabilities and equitable relief.
Many married taxpayers choose to file a joint tax return because of the financial advantages and tax savings. Yet, when married taxpayers file jointly, both taxpayers are held jointly and individually liable, even if they separate or divorce. The tax, interest and penalties associated with a joint return may be collected from either or both of the taxpayers even if a divorce instrument states that one spouse will be responsible. In fact, one spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. Thus, filing jointly during the marriage and after separation presents spouses with risks they must consider and protect themselves against.
The Internal Revenue Code — §6015(b), (c) and (f) — offers three possible remedies for spouses who find themselves defending erroneous joint tax returns: innocent spouse relief, separation of liabilities and equitable relief. The most comprehensive form of relief, innocent spouse relief, is also the most difficult to obtain. By requesting innocent spouse relief, a joint taxpayer can be relieved of responsibility for paying tax, interest, and penalties caused by erroneous or omitted items reported by a spouse or former spouse on a joint tax return.
To take advantage of the rules, an election must be made by the spouse seeking relief. Form 8857 permits taxpayers to apply for all three types of relief available under I.R.C. §6015. Only one form needs to be filed, even if relief is requested for more than one year. The form requires an applicant to provide detailed information about the applicant’s marital status (including domestic violence), education, employment, income, expenses, and health status; how the erroneous returns were prepared; what knowledge the applicant may have had about the returns and household finances generally; and what benefits the applicant may have received, including purchases.
The IRS will review the form, figure the understatement or underpayment of tax and related interest and penalties, and let the applicant know if he or she qualifies.
The IRS is required to inform the applicant’s spouse or former spouse even if the applicant is a victim of spousal abuse or domestic violence. All information disclosed in the form may be shared with the nonrequesting spouse, except for the applicant’s basic contact information.
A taxpayer must meet all of the following conditions to qualify for innocent spouse relief:
- a joint return was filed for the tax year for which relief is sought;
- there is an understatement of tax attributable to erroneous items of the applicant’s spouse;
- the applicant did not know, and had no reason to know, that there was an understatement of tax;
- taking into account all the facts and circumstances it would be inequitable to hold the applicant liable for the deficiency; and
- the applicant elects innocent spouse status not later than two years after tax collection activities have begun.
IRS Publication 971, “Innocent Spouse Relief,” contains a handy flowchart. In Chapter 11 of my book, Frumkes & Vertz on Divorce Taxation, we provide a detailed analysis of the requirements for innocent spouse relief, separation of liabilities and equitable relief from joint tax liabilities.
In Western Pennsylvania, call Brian C. Vertz for help with complicated child support and divorce issues. In Pittsburgh and Western Pennsylvania, call Brian at 412-471-9000.