In a previous post, we covered injured spouse relief as an option for a taxpayer who saw their refund used by the IRS to offset tax debt incurred by their spouse before the marriage.
But what options are available to a spouse who incurs tax liabilities for joint returns filed during the marriage that contained errors that result from mistakes or omissions made by the other spouse? Are there options that will grant relief to a spouse who now has a tax balance because of taxes that were not paid or underpaid by the other spouse?
This post discusses the options available from the Internal Revenue Service (IRS) for innocent spouse relief for a spouse who files jointly with their partner and later discovers the existence of errors in their returns or unpaid or underpaid tax liabilities caused by the other spouse.
Joint Filing: Benefits and Liabilities
When determining whether innocent spouse relief is applicable, the first question that must be answered is whether the spouse seeking relief filed a joint return with their partner.
Married couples have the option to file their taxes jointly or separately. Choosing a joint filing status can lead to several benefits, including access to lower tax rates and increased eligibility for various tax credits and deductions. These benefits can significantly reduce a couple's overall tax liability.
However, married couples must be aware that filing jointly creates joint and several liability for any jointly filed tax returns. This means that both spouses are equally responsible for the accuracy of the return and the full payment of any tax, interest and penalties due. This joint responsibility persists even if the couple later divorces or separates. A spouse cannot avoid or shift responsibility for these taxes through a divorce settlement.
It is not uncommon for one spouse to prepare a couple's joint return with little or no input from the other spouse. The non-preparing spouse may simply sign the return with little or no review and even less understanding as to what the return includes and represents. In some instances, the preparing spouse may even sign for the other spouse.
When issues later arise within the context of injured spouse relief, the IRS will look at the couple's filing history and review the filing requirement of the spouse who is claiming that they did not consent to the return that was filed. If the spouse seeking innocent spouse relief has a history of filing jointly with their partner, it will be difficult to claim that they had no knowledge that a return was being filed on their behalf. This is true even if the other spouse forges their signature.
The second factor that the IRS will consider is whether the spouse filing for innocent spouse relief had a filing requirement. An individual has a legal requirement to file an income tax return with the IRS if their annual income is greater than the standard deduction. It is difficult to successfully argue that innocent spouse relief is warranted in circumstances where the spouse seeking the relief had a filing requirement and made no attempt to file separately outside of the jointly filed return.
If the person seeking innocent spouse relief can show that he or she filed independently or that they had no filing requirement for that year, they have a much stronger case that any resulting tax balances from the joint return should not be attributed to them through joint and several liability.
This is also true when the spouse that prepared and filed the original return later files an amended return resulting in a tax liability. Provided that the spouse seeking relief can demonstrate a lack of knowledge that any adjustments were made, or that he or she had no access to the family's books and records, innocent spouse relief may be sought.
The spouse seeking relief must be able to show that the return as filed was inaccurate, or that if it was accurate, the resulting balance was never paid when the return was amended by their partner.
What is Innocent Spouse Relief?
In simple terms, innocent spouse relief could relieve you from paying taxes if your spouse understated their income or failed to pay any tax due and you can prove that you did not know about the errors or omissions. Tax issues can arise from errors such as unreported income or improperly claimed deductions and credits.
The IRS reviews returns for accuracy and completeness based on its records and other tax filings made by third parties. If the IRS discovers errors that result in an increase in tax, it will issue a notice to the couple seeking payment. When these errors occur, it might seem unfair for both spouses to suffer the consequences, especially if one was unaware of the mistakes.
This is where the IRS's innocent spouse relief comes into play. There are three types of relief:
- Innocent Spouse Relief: This relief absolves you from additional taxes owed if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits on a jointly filed return.
- Relief by Separation of Liability: Through this form of relief, the IRS agrees to treat the jointly filed return as if it were filed as two married filing separately returns. By characterizing the joint return as two separate returns, each spouse is only responsible for their specific income, any associated credits and deductions, and their personal share of the taxes that were due when the return was originally filed.
- Equitable Relief: If you do not qualify for the first two types of relief, you may apply for equitable relief. Equitable relief may be appropriate if, based on all the facts and circumstances, it would be unfair to hold you liable for your spouse's tax understatement or underpayment.
Qualifying for Innocent Spouse Relief
To qualify for any of the three types of innocent spouse relief, you must meet specific criterion:
- You must have filed a joint return which has an understatement of tax.
- The understatement must be due to errors made by your spouse.
- You must be able to establish that when you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax.
- Given all the facts and circumstances, it would be unfair to hold you liable for the tax owed.
To qualify for general innocent spouse relief or relief by separation of liability, the applying spouse must file for relief within two years of the first collection notice issued by the IRS. There is no filing deadline for a spouse seeking equitable relief.
Application Process
The process for applying for innocent spouse relief involves filling out IRS Form 8857, "Request for Innocent Spouse Relief." This form should not be filed with your tax return, and it has its own specific submission requirements. It is crucial to file this form as soon as you become aware of a tax liability for which you may qualify for relief.
Important Considerations
When requesting innocent spouse relief, the IRS requires you to file within two years after the first tax assessment. This is typically the tax filing date for the year in dispute. Failure to meet the two-year deadline will likely disqualify you for assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.