If you are an “innocent spouse” there may be income tax relief for you.
You may be wondering if you have personal liability for income tax, interest, and penalties resulting from an understatement of tax on a joint return you filed with your [spouse/former spouse].
When spouses file a joint income tax return, both spouses are responsible for the entire tax liability. This is known as joint and several liability. Joint and several liability applies to the tax liability shown on the joint return, as well as to any additional tax liability the IRS determines to be due. The IRS can collect these taxes from either spouse even if they later divorce and the divorce decree states that one of the former spouses will be solely responsible for the tax. In some cases, however, a spouse (or former spouse) will be relieved of the tax, interest, and penalties on a joint tax return.
The tax law provides three types of relief from joint and several liability:
(1) innocent spouse relief,
(2) separation of liability relief, and
(3) equitable relief.
You must file Form 8857, Request for Innocent Spouse Relief, to request any of these types of relief. For innocent spouse relief and separation of liability relief, Form 8857 must be filed no later than two years after the date on which the IRS first attempted to collect the tax.
Innocent Spouse Relief
Generally, innocent spouse relief relieves you of responsibility for paying tax, interest, and penalties if your [spouse/former spouse] improperly reported items or omitted items on your joint tax return. To qualify for innocent spouse relief
(1) you must have filed a joint return with your [spouse/former spouse];
(2) there must be an understated tax on the joint return that is due to erroneous items (unreported income or improper deduction, credit, or property basis) of your [spouse/former spouse];
(3) you must be able to show that when you signed the joint return, you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed); and
(4) taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax.
Separation of Liability Relief
Under separation of liability relief, you may elect to allocate a tax deficiency if certain requirements are met. Thus, the understated tax (plus interest and penalties) on a joint return is allocated between you and your [spouse/former spouse]. The understated tax allocated to each spouse is generally the amount that spouse is responsible for. This type of relief is available only for unpaid liabilities resulting from the understated tax. Refunds are not allowed. To request separation of liability relief, you must have filed a joint return with your [spouse/former spouse] and at the time you file Form 8857, you either
(1) are no longer married to, or are legally separated from, the spouse with whom you filed the joint return; or
(2) were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.
This is relief that the IRS can grant when relief is not available under the other two provisions, and it includes relief from liability for taxes that were reported on your joint return but haven’t been paid.
Thus, even if you do not qualify for innocent spouse relief or separation of liability relief, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. The IRS has the discretion to grant you equitable relief from joint and several liability when, considering all of the facts and circumstances, it would be inequitable to hold you jointly and severally liable. Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax or an underpaid tax. You may qualify for equitable relief if
(1) you filed a joint return for the tax year for which you seek relief;
(2) relief is not available under any other relief provision;
(3) you and your spouse did not transfer assets to one another as a part of a fraudulent scheme;
(4) your spouse did not transfer certain disqualified assets to you;
(5) you did not knowingly participate in the filing of a fraudulent joint return; and
(6) the income tax liability from which you seek relief is attributable to an item of the spouse with whom you filed the joint return, or an underpayment resulting from that spouse’s income, with certain exceptions.
If your spouse did transfer disqualified assets to you, relief is generally available only to the extent the income tax liability exceeds the value of the disqualified assets. Also, even if there was a transfer of disqualified assets, you may be eligible for relief if you were abused by your spouse or your spouse maintained control over the household finances by restricting your access to financial information, or you did not have actual knowledge that disqualified assets were transferred.
There are quite a few requirements to qualify for this relief. If the basic conditions are met, IRS will make a streamlined determination granting equitable relief if you establish that you:
- are no longer married to the spouse (the nonrequesting spouse) with whom you filed the joint return. Thus, you must be divorced, legally separated, a widow or widower, or not be a member of the same household as the nonrequesting spouse during the 12 months before requesting relief.
- would suffer economic hardship if relief isn’t granted. In general, economic hardship exists if satisfaction of the tax liability (in whole or in part) will cause you to be unable to pay reasonable basic living expenses, taking into account a wide variety of your personal circumstances.
- did not know or have reason to know that there was an understatement of tax or a tax deficiency on the joint return, or did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint return.
Even if you don’t meet every one of these conditions, relief may be available as long as you meet the basic threshold requirements. In this case, the IRS will weigh all of the factors both in favor and against granting you relief in deciding whether it would be inequitable to hold you liable for the unpaid tax or tax deficiency.
You should also keep in mind that a request for relief of an unpaid liability has to be made before the expiration of the period of limitations on collection of an income tax liability or generally within ten years after the assessment of the tax by the IRS. For a claim for credit or refund, the request has to be made before the expiration of the period of limitations on credits or refunds. That period generally expires on the later of (1) three years from the date the return was filed or (2) two years from the date the tax was paid.
Please contact us at your convenience so that we can discuss the rules regarding relief from joint and several liability as they apply to your particular situation.