Innocent Spouse Tax Relief
Key Takeaways:
Innocent spouse tax relief allows the tax liability of a joint return to be placed on one spouse because of an understatement of tax due to erroneous items reported.
The five main filing statuses are single, married filing jointly, married filing separately, head of household, and widow(er) with dependent child.
To qualify for innocent spouse relief, the requesting spouse must be partially or fully unaware of the understatement of taxes erroneously reported on their joint return by the other spouse and the IRS must determine that it would be unfair to place responsibility on the requesting spouse given the circumstances of the situation.
An erroneous item on a tax return includes unreported income, incorrect tax deductions or credits, or false property basis claims.
During an innocent spouse investigation, the IRS determines if the requesting spouse had “actual knowledge” or “reason to know” in regard to the false information reported on a joint tax return.
The three types of innocent spouse tax relief include innocent spouse relief, relief by separation of liability, and equitable relief.
To request innocent spouse relief, you must qualify for one of the types of innocent spouse relief, request innocent spouse relief with the IRS, comply with the IRS investigation process, and, if necessary, appeal the IRS decision.
What Is Innocent Spouse Tax Relief?
When spouses file a joint tax return, both parties are equally responsible for paying the balance owed in the case of an audit. Innocent spouse relief is a form of IRS tax relief that can be utilized when individuals decide to file a joint tax return with their spouse but are later held liable for taxes owed as well as interest and penalties due to erroneous items reported by the current or former spouse on a joint tax return.
Even if you divorce or are separated, if a tax return is audited, the Internal Revenue Service will go after both spouses when attempting to collect the unpaid taxes. If your spouse or former spouse is being subjected to a tax lien or tax levy, you may be caught up in the whole affair, even if you have nothing to do with the tax owed. If you are caught up in tax trouble because of a spouse’s action, you may qualify for an innocent spouse claim. If a taxpayer can prove that they qualify for this claim, then they may be relieved of any obligation for the tax debt. The IRS has established guidelines to determine who will receive qualified relief from this program.
You may fit into this category if:
If Your Spouse Operated A Separate Business Independently From You
If Did Not Personally Benefit From The Extra Money That Was A Result Of The Tax Deficiency.
If You Did Not Share Bank Accounts Or Had Not Access To The Money Generated From The Activity.
Types of Filing Statuses
Your tax return must be submitted in a particular way according to your tax bracket and marital status. When you submit a tax return to the IRS, your filing status can impact your tax liability for that tax year, so it is important to consider which option is most appropriate for you. There are five main filing statuses when you submit a tax return:
Single Filing Status
If you are unmarried or legally separated from your spouse on the last day of the year, you may not qualify for any other type of filing status.
Married Filing Jointly Filing Status
If you and your spouse decide to file a joint return, you will report your combined income and deduct your combined allowable expenses.
Married Filing Separately Filing Status
If you are married, you and your spouse can choose to file separate tax returns. This may be beneficial if you only want to be responsible for your individual tax liabilities.
Head of Household Filing Status
If you are unmarried, pay at least half of the living expenses for a household, and a qualifying person lives with you in the home, you may qualify to file as the head of household.
Qualifying Widow(er) with Dependent Child Filing Status
For two years following the death of your spouse, you may qualify to file as a qualifying widow(er) with a dependent child. This filing status would allow you to utilize joint return tax rates and the highest standard deduction amount if you do not utilize itemized deductions.
Innocent spouse relief can be useful for qualifying individuals who have previously filed a joint tax return with their spouse but there are problems with the accuracy of the return. Although this method of filing taxes is beneficial for happily married couples who are compliant with the Internal Revenue Code and pay their total tax liability on time, if a situation arises in which a tax return is filed with omitted income or a fraudulent scheme involving taxes arises, an innocent spouse without knowledge of these illegal processes may be able to escape the penalties of joint returns.
When should you apply for innocent spouse tax relief?
In most cases, when the season of tax returns rolls around, filing jointly is a convenient option for married spouses as it allows you to combine your income and expenses for the household.
In general, there are three main qualifications when requesting innocent spouse relief:
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When the innocent spouse applicant filed a joint return with their spouse, there was an understatement of tax due to erroneous errors that are attributable only to their current or former spouse.
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When the innocent spouse applicant filed a joint return with their spouse, they did not know and there was no reason to know that there was an understatement of tax due to erroneous items.
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Given the specific circumstances, it would be unfair to hold the innocent spouse liable for their current or former spouse’s understatement of taxes.
You will need to file a claim and qualify for relief, but one of our tax resolution specialists at Ideal Tax can assist you with evaluating your qualification details and determining what type of relief is available to you.
What is considered an "erroneous item" on a joint tax return?
An individual may be considered an innocent spouse if their former spouse erroneously reports items on the joint return. Erroneous items include unreported income, incorrect deductions or credits, or false property basis claims that are reported on a tax return. An innocent spouse may qualify for complete relief from an erroneous item if they were fully unaware of the erroneous item represented. If the individual was unaware of a portion of the erroneous item, they still may qualify for partial relief.
What is considered "actual knowledge" on a joint tax return?
The Internal Revenue Service will determine if a requesting spouse is eligible for innocent spouse tax relief based on their actual knowledge or “reason to know” what was reported on their joint return with their spouse. If you were aware of the understatement of income taxes at the time the joint return was filed, your request for innocent spouse relief will be denied and you will both be considered jointly liable for the taxes owed to the IRS. Regardless of the subjectiveness of this aspect of innocent spouse relief, the IRS determines the extent of liability on a case-to-case basis, so as long as you maintain records of your tax situation, you may still be eligible to find relief as an innocent spouse.
3 Types of Innocent Spouse Tax Relief
There are three types of innocent spouse relief that allow the innocent spouse to be relieved of the responsibilities of paying their federal tax bill, including tax liability, penalties, and interest.
Innocent Spouse Relief
If you are approved for innocent spouse relief, you may be relieved of any responsibility for paying tax, interest, and penalties associated with the tax debt. To qualify for this form of innocent spouse tax relief, your non-requesting spouse must have made an error on your joint tax return that you were unaware of. Due to your lack of knowledge about the errors, it would be unfair in this situation for you to be held responsible for the penalties of someone else’s negligence.
The application process for innocent spouse relief can become subjective when determining if the requesting spouse had “reason to know.” Additionally, it is more difficult for an innocent spouse seeking relief to be granted relief with the IRS if they received benefits from the erroneous tax return, such as paying fewer income taxes due to unreported income.
Relief by Separation of Liability
Compared to innocent spouse relief in which the innocent spouse is completely relieved of the tax liability of the joint return, under this type of relief, the Internal Revenue Service divides the tax debt between you and your spouse (or former spouse) for you both to pay back separately. Relief by separation of liability starts with an additional tax assessment like an audit that investigates the reported taxes. In this situation, like with innocent spouse relief, one spouse claims they had no knowledge regarding the error on the tax return.
This form of tax relief is often used when people file joint returns but were a victim of domestic abuse. In this situation, one spouse may have been reluctant to challenge the filed return out of fear of retaliation by the other spouse. Usually, the spouses must have a divorce decree or be separated from their spouse to qualify for separation of liability.
Equitable Relief
If you do not qualify for either of the above, you may still be relieved of the responsibility through equity relief. However, just like the other forms of innocent spouse relief, there are multiple qualifications you must meet in order to be qualified for equitable relief, including your knowledge of the situation, domestic abuse, your separation or divorce status, your health status when filing the return, your future tax compliance, and how you benefit from the tax return that was reported.
Call our Tax Consultants and allow them to review your case and determine what you qualify for. Knowing the right things to say in order to get your levy lifted is imperative. If you say the wrong thing or present the wrong evidence in your appeals case, you are done! Legal representation is the best way to go in these types of cases. Let our experienced mediators at Ideal Tax work with the IRS on your behalf in order to get your levy removed and restore your order to your life.
How To Request Innocent Spouse Relief Against A Former Spouse
If you think you may be eligible to request innocent spouse relief, there are four main steps to the application:
Qualify for one of the three forms of innocent spouse relief.
The first step to requesting innocent spouse relief is to determine if you qualify. It is important to educate yourself on the different types of innocent spouse relief to present your case appropriately to the IRS. It is beneficial to remember that if you apply for innocent spouse relief or separation of liability and the IRS rejects your request, they will automatically consider you for equitable relief based on that initial application.
Apply for innocent spouse relief.
To request innocent spouse relief, you must apply using Form 8857. This application document provides detailed information about the types of innocent spouse relief and what supplemental proof may be required to support your request.
Comply with the IRS investigation.
After you have applied for innocent spouse relief, an IRS examiner will review the facts and circumstances of your case and request additional information if necessary. It is important to keep in mind that the non-requesting spouse will also be involved in this investigation and may be required to submit documentation or information.
Appeal with the IRS, if necessary.
The IRS denies many innocent spouse relief requests, but if you have applied and believe you should still be eligible for this form of tax relief, you can appeal the decision with the IRS by completing Form 12509, a statement of disagreement. If you fail to reach an agreement by contacting IRS appeals alone, you still have the opportunity to take the case to tax court. The tax court petition process can take over a year, but if the requesting spouse is diligent, it is possible to achieve innocent spouse relief and ensure that the IRS can only go after your current or former spouse for the collection of tax liability, penalties, and interest.
Dealing with liability discrepancies in the case that your spouse owes taxes to the IRS can be stressful. Even though you filed a joint return with your current or ex-spouse, that doesn’t mean you are indefinitely responsible for paying the total tax debt, including interest and penalties, on erroneous items that you were unaware of. If you are facing a situation in which you may be eligible for innocent spouse relief, consulting with a tax professional is the best strategy to protect yourself from tax liability. If you are ready to combat your tax issues today, call Ideal Tax for expert guidance through the process of achieving tax relief through the Internal Revenue Service. For more information on various services, click here.
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