When married taxpayers file jointly, they become “jointly and individually” responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later separate or divorce.
Joint filers remain “jointly and severally liable” even if a divorce decree states that a former spouse is responsible for any amounts due on previously filed joint returns. The IRS will use all means to collect the tax from either or both of the spouses. One spouse may be held responsible for all the tax due, even if all the income was earned by the other spouse. However, a spouse may in certain cases be relieved of responsibility for tax, interest, and penalties on a joint return under special relief rules. There are three types of relief available:
1. Innocent spouse relief
2. Separation of liability
3. Equitable relief
INNOCENT SPOUSE RELIEF – To qualify for innocent spouse relief, a taxpayer:
1. Must have filed a joint return with an “understatement of tax” (i.e., the difference between the amount of tax that should have been shown on a return vs. the tax actually shown) that was due to “erroneous items” of his/her spouse;
2. Must establish that at the time he/she signed the joint return, he/she didn’t know (and had no reason to know) that there was an understatement; and
3. Accounting for all the facts and circumstances, it would be unfair (i.e., inequitable) to hold the taxpayer liable for the understatement of tax.
Erroneous Items are either:
- Unreported income that was received by the non-innocent spouse and isn’t reported on the return, or
- Incorrect deductions, credits, or basis claimed by the non-innocent spouse which are improper or for which there is no basis in fact or law.
Indicators of Unfairness are determined based on the facts and circumstances of each individual case. To decide unfairness, the IRS will check several factors, which include:
- Whether the “innocent spouse” received significant direct or indirect benefit from the understatement of tax. A significant benefit is one which is excessive in terms of normal support. Example: In March 2012, Jenna received $20,000 from Terence, her spouse of 10 years. The funds were traced to Terence’s lottery winnings in 2010. No winnings were reported on the couple’s joint federal return in 2010. The couple’s normal monthly household operating budget was around $4,000. More than likely, the IRS would rule that Jenna had received a significant benefit due to the $20,000 gift, even though it was received in a year other than the one in which the unreported income occurred.
- Desertion of the innocent spouse by the non-innocent spouse.
- Divorce or separation of the spouses.
- Innocent spouse received a benefit on the return from the understatement.
RELIEF BY SEPARATION OF LIABILITY – To file a claim for this type of relief, the understatement of a joint tax liability (including interest and penalty) must be allocated (separated) between spouses (or former spouses). Since this form of relief is for unpaid liabilities resulting from understatements of tax, the relief doesn’t generate refunds.
To request relief by separation, a taxpayer must have filed a joint return and meet either of the following when the application is filed:
- Be divorced or legally separated from the spouse with whom the joint return was filed (widowed counts the same as divorced or legally separated), OR
- Not be a member of the same household as the spouse with whom the joint return was filed during the 12-month period ending on the date Form 8857 is filed. Note: The reason for living apart must be due to estrangement, not temporary absence.
Limitations – Innocent spouse relief by separation won’t be granted in these situations:
1. IRS proves that the spouses transferred assets to each other fraudulently.
2. IRS shows that the “innocent spouse” had actual knowledge of erroneous items at the time of signing the joint return. NOTE: A victim of domestic abuse who had actual knowledge of errors may still qualify for relief if the abuse happened before signing the joint return and fear prevented the abused spouse from challenging treatment of return items.
3. The “non-innocent” spouse transfers property to the “innocent” spouse to avoid taxes. A transfer to avoid tax is presumed if made within one year before the date on which the IRS sent its first letter of proposed deficiency. However, this presumption doesn’t apply if the transfer is made under a divorce decree or separate maintenance agreement, nor does it apply where a taxpayer can establish that the main purpose of the transfer was not tax avoidance.
EQUITABLE RELIEF – If a taxpayer doesn’t qualify for the two other forms of innocent spouse relief, the IRS will automatically consider whether equitable relief is suitable to the situation. A taxpayer may qualify for equitable relief if all of the following are met:
1. The taxpayer doesn’t qualify under one of the other forms of relief (e.g., separation of liability);
2. The spouses didn’t transfer assets to each other fraudulently or for the purpose of avoiding tax payment;
3. The taxpayers’ return wasn’t fraudulently filed;
4. The taxpayer did not pay the tax owed (although a refund may be available for certain installment payments made after Form 8857 is filed);
5. The taxpayer can establish that it would be unfair (inequitable) to hold him/her responsible for the tax liability;
6. The income tax from which the taxpayer seeks relief is attributable to the “non-innocent” spouse, unless one of the following exceptions apply:
a. The item is partly or totally attributable to the taxpayer under community law.
b. An item titled in the taxpayer’s name is attributable to the taxpayer unless rebutted by facts and circumstances.
c. The taxpayer had no knowledge, or reason to know, that the “non-innocent” spouse misappropriated the funds that were intended to pay the tax.
d. The taxpayer establishes being an abuse victim before signing the return, and because of prior abuse, didn’t challenge the treatment of items on the return for fear of retaliation by the spouse.
INDICATORS OF UNFAIRNESS – The IRS considers all facts and circumstances to determine if it is unfair to hold the innocent spouse responsible for an underpayment or understatement of tax. The following factors are examples of items weighed by the Service in equitable relief cases:
- Separation or divorce of the involved spouses
- Economic hardship
- Lack of knowledge of the innocent spouse
- Non-innocent spouse’s obligation under a divorce decree to pay the tax
- The tax owed is attributed to the non-innocent spouse.
- No economic hardship if relief is not granted.
- Innocent spouse had knowledge of the understated items.
- Innocent spouse received significant benefit from the unpaid tax.
- Lack of good faith effort to comply with the tax law by the innocent spouse.
- Innocent spouse has an obligation to pay the tax under a divorce decree.
- Tax for which relief request is made is attributable to the innocent spouse.
Spousal Notification – Be aware that the law requires the IRS to inform your spouse or former spouse of the request for relief from liability. The IRS is also required to allow your spouse or former spouse to provide information that may assist in determining the amount of relief from liability. The IRS will not provide information to your spouse or former spouse that could infringe on your privacy. The IRS will not provide your current name, address, information about your employer, phone number or any other information that does not relate to making a determination about your request for relief from liability.
If you believe you qualify for relief under innocent spouse, separation of liability or equitable relief, you will need to complete IRS Form 8857 and include a written statement explaining why you would qualify for relief. You should also complete and attach IRS Form 12510 (Questionnaire for Requesting Spouse), which may help speeding up the processing. Generally, you can expect the IRS to request additional information before making their final determination.