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Innocent Spouse Tax Relief

Many couples file joint tax returns because in most cases it lowers their tax.  When filing jointly, however, both people are liable for the tax and any assessments imposed against the return.  This joint and several liability even survives the couple's divorce.  Joint and several liability means that each taxpayer is legally responsible for the entire liability. Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits. This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. In some cases, however, a spouse can get relief from joint and several liability.

The IRS has provided for three types of relief from joint and several liability for spouses who filed joint returns:

1) Innocent Spouse Relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.
2) Separation of Liability Relief provides for the allocation of additional tax owed between you and your former spouse or your current spouse from whom you are separated when an item was not reported properly on a joint return. The tax allocated to you is the amount for which you are responsible.
3) Equitable Relief may apply when you do not qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to your spouse. You may also qualify for equitable relief if the amount of tax reported is correct on your joint return but the tax was not paid with the return.

Taxpayers must request innocent spouse relief or separation of liability relief no later than 2 years after the date the IRS first attempted to collect the tax from you. For equitable relief, you must request relief during the period of time the IRS can collect the tax from you--if tax is unpaid, then generally 10 years from assessment. If you are looking for a refund of tax you paid, then you must request it within the statute period for seeking a refund, which is generally three years after the date the return is filed or two years following the payment of the tax, whichever is later. 

A taxpayer must meet all of the following conditions to qualify for innocent spouse relief:

  • Taxpayer filed a joint return that has an understatement of tax (deficiency) that is solely attributable to the other spouse's erroneous item. An erroneous item includes income received by your spouse but omitted from the joint return. Deductions, credits, and property basis are also erroneous items if they are incorrectly reported on the joint return;
  • Taxpayer establishes that at the time he/she signed the joint return they did not know, and had no reason to know, that there was an understatement of tax; and
  • Taking into account all the facts and circumstances, it would be unfair to hold taxpayer liable for the understatement of tax

To qualify for separation of liability relief, taxpayer must have filed a joint return and must meet one of the following requirements at the time relief is requested:

  • Taxpayer is divorced or legally separated from the spouse with whom they filed the joint return
  • Taxpayer is widowed, or
  • Taxpayer has not been a member of the same household as the spouse with whom he/she filed the joint return at any time during the 12-month period prior to the date relief was requested.

If at the time taxpayer signed the joint return he/she had actual knowledge of the item that gave rise to the understatement of tax, they do not qualify for separation of liability relief.

If someone does not qualify for innocent spouse relief or separation of liability relief, they may still qualify for equitable relief. To qualify for equitable relief, a taxpayer must establish that under all the facts and circumstances, it would be unfair to hold them liable for the understatement or underpayment of tax.  The IRS has established 7 factors to consider in granting equitable relief: 1) Whether the requesting spouse is married to the taxpayer; 2) Economic hardship to be suffered by requesting spouse; 3) Knowledge or reason to know by the requesting  spouse of the understatement; 4) Whether a divorce decree obligates the spouse to pay; 5) Whether requesting spouse received a significant benefit; 6) Whether the requesting spouse has otherwise complied with tax law; 7) Requesting spouse's health.

When taxpayer requests relief from joint and several liability, the IRS is required to notify the other party with with whom they filed the joint return and allow him or her to provide information for consideration regarding your claim.

Relief from joint and several liability should not be confused with an injured spouse claim for allocation of refund.  An injured spouse is someone who files a joint return and all or part of their share of the refund was or will be applied against the separate past-due federal tax, state tax, child support, or federal non-tax debt (such as a student loan) of their spouse. 

Call Bowman Law Firm for more information.

Gene M. Bowman, Tax Attorney & CPA