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Innocent Spouse Relief

Filing your taxes with your significant other can offer many financial benefits. For instance, a married couple’s choice to file their tax return using married filing joint status can often save the couple money because the married filing joint tax rates are lower than married filing separate tax rates, the standard deduction is higher, and additional exemptions may apply that would not apply if the couple chose to file separate returns.

Other times, filing a joint tax return can create problems. If you are married and file a joint return, this means that both parties are jointly and severally responsible for the tax liability, even if one person contributed more or all of the taxable income. If the IRS makes the determination that there was a tax deficiency, it can go after each spouse individually for payment of the tax liability. Unpaid joint tax liabilities put joint assets such as houses, bank accounts, and cars at risk. Furthermore, if one spouse dies, the IRS is still free to collect from the surviving spouse.

Therefore, married taxpayers should carefully consider whether married filing joint status is the proper filing status for their particular situation.

If only one spouse has income, and the tax cannot be paid, the proper legal strategy might be to have the spouse with income file a return using married filing separate status. While this may result in a higher tax liability than if the taxpayers filed together using married filing joint status, the spouse filing the return using married filing separate status would be liable for the tax shown on the return, unless the taxpayers live in a community property state).

Filing separate tax returns using married filing separate status may not always be an option, however. For instance, if a tax return was already filed using married filing joint status, you cannot file amended returns using married filing separate status. It is also possible that the return was already filed, and the tax liability is already due.

Fortunately, relief from joint and several liability for tax may be available under certain circumstances where a joint tax return is filed. Under certain circumstances, one spouse on a joint return can file for relief from joint and several liability (a/k/a “innocent spouse” relief) and, if the IRS grants the requested relief, the requesting spouse will be relieved of the liability and only the non-requesting spouse will remain liable for the outstanding tax debt.

Generally, there are three types of relief commonly referred to as “innocent spouse” relief. Each has its own legal requirements. Also, it matters whether the tax liability is an “understatement of tax” or an “underpayment” of tax.

  • Understatements vs. Underpayments

An understatement of tax, or tax deficiency, occurs when the IRS makes changes to a filed tax return, usually as a result of an audit or examination, and determines that there was unreported tax on the return as it was originally filed.

An underpayment of tax occurs when the filed joint tax return reported tax due, but that tax was not paid.

If the taxpayers are faced with an understatement case, then “innocent spouse” relief is available under all three types of relief. If the taxpayer faces an underpayment case, then only the “equitable relief” type is available.

  • Types of “Innocent Spouse” Relief
        1. Innocent Spouse Relief
            Innocent Spouse Relief provides relief from additional tax owed if a taxpayer’s spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.
            This type of relief is available in cases whether or not the taxpayers are still married and living together. To qualify for innocent spouse relief, the requesting spouse must show:
              • A joint return was filed;
              • There was an understatement of tax (deficiency) on the return that is solely attributable to the non-requesting spouse’s erroneous item (for example, the non-requesting spouse failed to report income attributable to the non-requesting spouse’s business, or overstated business expenses);
              • The requesting spouse did not know or have reason to know that there was an understatement of tax when the return was signed; and
              • Taking into account all the facts and circumstances, it is inequitable or unfair to hold the requesting spouse liable.
        2. Separation of Liability Relief
            Separation of Liability Relief provides for the allocation of additional tax owed because an item was not reported properly on a joint return between the requesting spouse and the non-requesting spouse. The tax allocated to the requesting spouse is the amount for which the requesting spouse is responsible.
            Only taxpayers that are no longer married, legally separated, or not living together may request this type of relief. To qualify for separation of liability relief, the requesting spouse must show:
              • A joint return was filed that has an understatement of tax (deficiency);
              • There was an understatement of tax (deficiency) on the return;
              • The requesting spouse is (1) divorced or legally separated from the spouse with whom the requesting spouse filed the joint return, (2) is widowed, or (3) has not been a member of the same household as the spouse with whom the requesting spouse filed the joint return at any time during the 12-month period ending on the date relief is requested; and
              • The requesting spouse did not have actual knowledge of the item that gave rise to the understatement or that there was unreported tax.
        3. Equitable Relief
            Equitable Relief may apply when a taxpayer does not qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to the taxpayer’s spouse. Also, it is the only type of relief available for underpayment cases in which the correct amount of tax was reported on the joint return but the tax was not paid with the return.
            To qualify for this type of relief the requesting spouse must show:
              • Relief is not available under either Innocent Spouse or Separation of Liability criteria;
              • Under all the facts and circumstances, it is inequitable or unfair to hold the requesting spouse liable for an unpaid tax or deficiency;
              • The requesting spouse and non-requesting spouse did not transfer assets to one another as a part of a fraudulent scheme; and
              • The tax liability is attributable to an item of the non-requesting spouse with whom the requesting spouse filed the joint return, unless one of several exceptions applies.
            Under Equitable Relief, some of the factors the IRS applies to decide whether it is inequitable to hold the requesting spouse liable include:
              • Whether the requesting spouse is still married to the non-requesting spouse,
              • Whether the requesting spouse will suffer an economic hardship if the relief is not granted (whether the requesting spouse would be unable to pay basic living expenses),
              • Whether there is a legal obligation (i.e., divorce decree or arrangement) obligating the requesting spouse or non-requesting spouse to pay the tax,
              • Whether the requesting spouse received a significant benefit (beyond normal support_ from the understatement or underpayment,
              • Whether the requesting spouse made a good faith effort to comply with federal income tax laws for the year for which the relief is sought, and
              • Whether the requesting spouse knew or had reason to know about the understated tax or that the tax would not be paid.

Innocent spouse relief can be very difficult to obtain from the IRS, and in fact, many cases are denied due to error or misrepresentation. That’s why it is important to have an experienced IRS tax attorney in your corner to make sure that your rights and your assets are protected.

A tax attorney at the Politte Law Offices can analyze your case for Innocent Spouse protection and structure a comprehensive plan to protect you from a negligent spouse. We will speak with the IRS on your behalf, and help you protect yourself and your assets from a tax liability you did not cause.

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