INNOCENT SPOUSE AND IRS
INNOCENT SPOUSE: AN INTRODUCTION
Financial decisions in a marriage are not always a joint venture; wherein both Husband and Wife cooperate in the decision making. In the first few years of my own marriage, my Husband filed our taxes for us. I would check to ensure he put in all my information, but I never looked to see what numbers he was putting into his part of the tax return. Now that I am an attorney practicing in divorce, I know the detrimental effects that can occur in these situations.
Sometimes the spouse in charge of the finances may make misrepresentations to the Internal Revenue Service (IRS) or they may not file a tax return at all. Even though only one spouse may be in charge of the finances, both Husband and Wife will be jointly and severally liable for any unpaid taxes, fees, interest, and penalties, even if you are the innocent spouse. When getting married, we put a lot of trust and faith in our spouse to do what is right, what is correct, and what is honest; but if something is done with your name attached, I urge you to be just as vigilant as I am now and double check everything!
If you’re currently going through a divorce and you determine that your spouse made these misrepresentations, is there any way to prevent your spouse’s mistakes from hurting you?
If the parties agree that the spouse who filed the tax return is the responsible party, the attorneys may write that agreement into a Settlement Agreement as part of the Final Decree of Divorce. If the parties do not agree, the Judge may hear testimony regarding that tax return liability and the Judge may allocate that debt in his/her Decision as part of the Final Decree of Divorce. If the person found liable for the debt pays the tax liability, there needs to be no further action. However, this is generally not the case. Often times it is written as part of the Decree, but the responsible party will not pay the indebtedness. If you are the innocent spouse, this can be problematic for you! Merely having it listed in the Final Decree will not relieve liability! Even though you are found to be the innocent spouse as part of a divorce, you may receive notices from the IRS, your wages may be garnished, any monies you win may be usurped, and future tax returns may be affected.
Is there any relief for the spouse who feels he/she should not be liable for past due taxes, fees, and penalties derived from a joint tax return?
In some cases, a spouse may be relieved of past due taxes, fees, and penalties on a joint tax return. There are three ways in which a spouse may seek relief. They include: Innocent Spouse Relief, Separation of Tax Liability or Equitable Relief.
The purpose of this Blog is to share some information about Innocent Spouse Relief for those who may not either know of its existence or how to use it. If you find you do not qualify for Innocent Spouse Relief, please click here to view additional information on Separation of Tax Liability or Equitable Relief.
How do I qualify for Innocent Spouse Relief?
In order to qualify for Innocent Spouse Relief you must meet all of the following conditions:
- You filed a Joint Tax Return.
- There is an understated tax on the return that is due to erroneous items of your spouse or former spouse.
- You must establish that you had no knowledge or reason to know that the understated tax existed.
- Taking into account all the facts and circumstances, it would be inequitable to hold you liable for the understated tax.
INNOCENT SPOUSE: What is Understated Tax?
Understated Tax is where the IRS determines that you owe more taxes than what was stated on your return.
INNOCENT SPOUSE: What is an erroneous item?
An erroneous item can include the following:
- Unreported Income
a. For example, if the spouse made tips or received a bonus and never reported it to the IRS. - Incorrect deductions, credits, or basis
a. For example, your spouse made a business expense deduction, but never incurred those expenses.
INNOCENT SPOUSE: How does the reviewer determine if there was “actual knowledge” or a person had “reason to know” of an erroneous item?
When reviewing if the alleged innocent spouse had “actual knowledge” or “reason to know” about an erroneous item, they look at the totality of the circumstances. “Actual knowledge” means that you knew your spouse was making the erroneous filing, ie. you knew he/she was not reporting income, you knew he/she was making false deductions, you knew he/she was taking credits that they should not have been taking, etc. In determining if you had “reason to know,” the reviewer will look to the nature of the erroneous item and the amount of the erroneous item compared to other items, the financial situation of you and your spouse, your educational background and business experience, the extent of your participation in the activity that resulted in the erroneous item, whether a reasonable person would have asked about an erroneous item or the items in the tax return as a whole, and whether the erroneous item was a departure from common tax filings.
INNOCENT SPOUSE: When would the IRS determine it would be inequitable to hold you liable?
The IRS makes the determination that it would be inequitable to hold you liable by looking at the totality of the circumstances. They look to see if you received a significant benefit from the erroneous item, whether your spouse deserted you, whether you and your spouse had been divorced or separated at the time of the filing, and whether you received a benefit from the tax return with the erroneous item. If you have not received a benefit or if you were divorced or separated at the time the filing was made, the IRS would be more likely to find that it would be inequitable to hold you liable. These are not the only circumstances the IRS looks at when making their determination.
INNOCENT SPOUSE: How do I get started if I believe I qualify for Innocent Spouse Relief?
If you believe you qualify for Innocent Spouse Relief, you file IRS Form 8857. It will ask for your name, address, ex-spouse’s name and address, and for your financial information. It will further ask you other personal information, such as your educational background, mental health, years that you would like relief from tax liability, etc. If you are divorced, you will attach a copy of your Final Judgment and Decree of Divorce. Attaching a letter explaining the existing circumstances that show you qualify for Innocent Spouse Relief is not uncommon. In fact, I like to encourage my clients to file a letter, as it only further strengthens one’s argument.
INNOCENT SPOUSE: When should I file for Innocent Spouse Relief?
You should file for Innocent Spouse Relief as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held liable (ie. when you receive a notice from the IRS or the IRS is examining your tax return). You MUST file for Innocent Spouse Relief no later than two (2) years after the first IRS attempt to collect the tax from you that occurs after July 22, 1998.
FINAL WORD ON INNOCENT SPOUSE RELIEF
Innocent Spouse Relief is judged on a case-by-case basis. Not every situation will result in a finding that you are an innocent spouse and should not be held liable for understated tax liability. If you have further questions about Innocent Spouse Relief, the Internal Revenue Service offers information at 1-866-897-4270 or you can contact me by phone at (937) 293-2141 or by e-mail at shively@hcmmlaw.com.
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