What is innocent spouse tax relief, and how do you get it? If your spouse made mistakes or flat-out lied on a joint income tax return and you signed it, the IRS holds both of you jointly responsible for any unpaid taxes.1
Simply saying you didn’t understand or you didn’t ask when you signed the return is not going to cut it. But the IRS is not entirely heartless. It understands that there are often genuine situations in which one spouse should not be held responsible for unpaid taxes and penalties caused solely by the mistakes, fraud, or abuse of the other
New Mercy from the IRS
The IRS has just made it easier to obtain innocent spouse relief with its release of Notice 2012-8.2.
Say you filed a joint return with your culprit spouse who cheated on the taxes without your knowledge. In this situation, you can qualify for innocent spouse relief. This means the culprit spouse has to pay, not you.
Tax law contains several paths to being identified as an innocent spouse. In the new rules just issued, the IRS made it easier to qualify for “equitable relief” as an innocent spouse. Here’s more good news: The innocent spouse can qualify for equitable relief in all 50 states.
As you know, community property states often have different rules, but equitable relief on a joint income tax return
applies in a community property state the same as it applies in a non–community property state.
Factors in Your Favor
You bear the burden of proof when asking for innocent spouse relief.7
In general, the IRS looks at factors that favor and disfavor relief and then makes its decision to grant relief or not. You need more or bigger factors in your favor to win relief.
Factors that weigh in favor of relief include the following:8
You are divorced, legally separated, or no longer part of the same household for the past 12 months. You would suffer economic hardship if you have to pay. (To qualify for economic hardship, your income
should be below 250 percent of the federal poverty guidelines or your monthly income should exceed your expenses by $300 or less.)
Your spouse physically or mentally abuses you.
You did not know or had no reason to know of the errors or fraud committed by your spouse. You did not know or had no reason to know that your spouse would not or could not pay the taxes within a reasonable amount of time.
You had restricted access to financial records or limited financial control over household finances.
You have limited or no education.
You complied with tax laws after you discovered the erroneous tax return with your spouse. You remain married, but now you file a separate income tax return because you discovered your spouse’s errors.
You are in poor mental or physical health. Factors against You
Factors that weigh against getting relief include those listed below:9
You signed the joint tax return even though you knew your spouse had prior bankruptcies, financial problems, or pre-existing issues with the IRS, or could not pay bills on time.
You are involved in household finances, participate in your spouse’s business, or enjoy a lavish lifestyle. You have access to the joint bank accounts. You have many credit accounts in your name or with your spouse.
You are highly educated, own your own business, or are in a career that would give you knowledge regarding financial matters. You discovered the errors of your spouse’s ways, but you failed to comply with tax laws in the years following your discovery.
Remember, the IRS weighs the good and the bad in making its decision to grant or not to grant equitable relief to the innocent spouse. It’s likely that you will have some good factors and some bad factors that go into the IRS weighing machine.
The good news is that even if negative factors outnumber the positive, the IRS can grant equitable relief.
Here are three examples of how the IRS weighs the factors.
Example 1. My husband prepares our income tax return. I just sign it where he tells me to. Last year, the IRS said we owed $20,000 more in taxes. Now, we’re getting a divorce. Can the IRS come after me if he doesn’t pay?
Answer 1. Most likely, yes! To qualify for equitable relief as an innocent spouse, you need to prove that your husband is solely responsible for the
mistake causing the additional taxes and that you did not know about or had no reason to know about the mistake.
Then there are these questions:
Should you have known about your husband’s mistake?
What is the nature of your relationship and involvement in household finances? Are you highly educated? Did you benefit from a lavish lifestyle?
Did you and your husband have a joint checking account? If you can show that you made efforts to inquire about questionable items on the return or you received assurances from an income tax preparer that the return was accurate, then the IRS might grant you equitable relief.
Example 2. My wife opened an IRA in my name by forging my signature, made contributions to the IRA, and then took a taxable distribution from it, which she deposited into her personal checking account. She did not include the taxable distribution in our income. Am I liable for the tax deficiency?
Answer 2. You appear likely to qualify for equitable relief. You can easily prove that your wife forged your name and then cheated on the taxes without your knowledge.
Example 3. My husband is a partner in a business and falsely claimed $80,000 in expenses on our 2010 joint income tax return. I am not a partner in his business, so there was no way for me to know that the expenses he was claiming were not accurate. We divorced in 2011. The IRS has just audited the 2010 return, has disallowed his expenses and is asking for more than $30,000 in taxes and penalties. Do you think I will qualify for equitable relief?
Answer 3. You were not a partner in the business, had no knowledge that your cheating husband was inflating his expenses, and had no reason to believe that he was falsifying information on your joint return. You likely will obtain relief, and the IRS likely will make your husband pay the entire amount.
File for Relief
If you think you are a good candidate for innocent spouse relief, your first step is to file IRS Form 8857.11 File as soon as you find out that you and your spouse owe money to the IRS. The new equitable relief rules require a claim for relief before the time limit for collection expires.12 Typically, the IRS has 10 years from the date the deficiency is assessed for its collection activities.