Understanding What Innocent Spouse Relief Is, and Whether You Need It

Understanding What Innocent Spouse Relief Is, and Whether You Need It

  • Learn the definition of Innocent Spouse Relief and the criteria involved in qualifying for it.
  • Find out how the IRS pursues payment of any taxes owed, as well as penalties, fines, and interest.
  • Learn how you can disprove that you had knowledge of your spouse’s understated tax.
  • Discover ways to prove that you deserve to receive Innocent Spouse Relief.
  • Find out how to request Innocent Spouse Relief.

When you were married, you and your spouse pledged your love for each other. You promised to stand together through good times and bad, sickness and health. But what happens if your spouse turns out to have understated their income for whatever reason, and you signed a joint tax return without realizing it? Can you be held responsible or can you receive innocent spouse relief? Fiducial has more information below.

Finding out that your spouse has dragged you into their tax issues is a twofold problem. There’s the emotional aspect that surrounds your relationship and your marriage. There is also the more pragmatic issue of whether their actions make you subject to fines or penalties. You’ll also want to know whether you’ll have to pay their taxes.

Though we have no advice for you on the former, there’s good news on the latter. You’re probably eligible for what we call Innocent Spouse Relief.

Understanding What Innocent Spouse Relief Is, and Whether You Need It

Filing Joint Taxes and Innocent Spouse Relief

Most married couples file their taxes jointly. There are plenty of reasons for doing so, including several important incentives for doing so that the government offers.

But when you sign a joint income tax return, it makes both you and your spouse equally responsible for the taxes that are due. This includes any fines, penalties, and interest that may accrue. That responsibility is joint – meaning that you owe it together. However, it is also able to be collected severally. This means that each individual may have to pay the whole.

Both spouses sign joint tax returns. The signature is a pledge that the taxes are accurate. When the IRS finds that is not the case, it has no interest in or ability to establish which spouse is behind the error. It also has no interest in deciding who should make up the difference. Both spouses are responsible for paying their tax liability, and it is legally up to them to make it happen.

But what happens if the parties do not pay the shortfall and any related penalties or fines? Then the IRS can pursue both parties legally and financially, together or separately. In fact, the courts have gone so far in support of the IRS’ pursuit of either spouse that they have determined that the agency does not have to abide by divorce decrees and other legally binding agreements meant to divert the agency away from one or the other spouse.

Still, the agency has acknowledged that their equal opportunity pursuit of both signors of a joint tax return is not necessarily appropriate when one of the partners was unaware of their spouse’s wrongdoing. That’s where Innocent Spouse Relief comes in.

What is Innocent Spouse Relief?

It specifically grants liability relief to an innocent spouse for any unpaid taxes for income or wrongdoing about which they were unaware. This includes associated interest and penalties. What if there are portions of the tax return that are correct and legitimate? Then the co-signer of the return is still responsible and can be pursued for those related taxes and fees.

Has your spouse omitted income or exaggerated deductions that you have just become aware of? Want to see whether you qualify for Innocent Spouse Relief? Here are the basic criteria:

  • Having filed a joint tax return with your spouse
  • The IRS has indicated that the tax liability on your joint tax return is greater than the amount reflected on the form
  • The shortfall in the amount reflected on your tax return was a direct result of an action by your spouse
  • You are able to demonstrate a lack of knowledge about the shortfall on the tax return. Additionally, you had no reason to suspect that such a thing had occurred (the IRS refers to this as an absence of either “reason to know” or “actual knowledge”)
  • The IRS agrees that it would reflect a level of “unfairness” to hold you responsible for the shortfall created by your spouse.

So, how does the IRS establish – or how do you disprove — that you had knowledge of your spouse’s tax evasion?

It’s all a matter of timing. What if the IRS has reason to believe that you knew about the issue at the time of filing (and when you signed)? Then they will not consider you innocent. In fact, they would deem you to be equally liable and ineligible for innocent spouse relief unless you can prove you, in fact, had no knowledge of the shortfall when the return was signed.

Of course, proving what somebody knew or didn’t know is a big challenge. So, the government only holds itself to the standard of proving that there was “reason to know.” There are a few considerations that go into that test, including:

  • The type of tax deficiency involved and the amount as compared to other list items in the tax return
  • The couple’s finances
  • The educational background and business experience of the spouse who is claiming innocence
  • How much each spouse actively engaged in the specific issue that the tax deficiency involved
  • Whether, in a way considered reasonable, the spouse claiming innocence questioned the specific items involved in the deficiency on the return when signing it
  • Whether the deficiency made that year’s return significantly different from previous years’ returns

The basic element that these considerations are proving or disproving is whether the spouse claiming innocence had a reason to know or suspect that there was something amiss on the return at the time that they signed it.

And since knowledge is hard to prove, courts limit their decision that knowledge existed to situations where the IRS can provide significant evidence that the spouse claiming innocence actually did know about the wrongdoing. Without strong proof, courts generally uphold the innocence plea.

How Would You Prove Yourself to Be Deserving of Innocent Spouse Relief?

Have you filed a joint return and want to prove yourself eligible for innocent spouse relief? You need to meet three specific criteria.

  • A belief that the discrepancy was a result of a mistake discovered after the tax return was filed
  • Have evidence that you didn’t know about the discrepancy
  • Show that you believe that after all the information is presented to the court, it will be evident that you shouldn’t be held responsible

Each of these points goes back to whether you had reason to know about the shortfall on your tax return. In some cases, the understated taxes at issue occurred because of incorrect calculations. Taxpayers make math errors or mistakes regarding credits or tax basis on an asset. But in other cases, it is a matter of unreported income, either from a side business, cash transactions, or investments.

How to Request Innocent Spouse Relief

If you want to request innocent spouse relief you need to do so within two years of the time that you become aware that the IRS made attempts to collect the amount that is owed. The interpretation of two years can come in a number of ways. They include you becoming aware of the mistake on the return and suggesting to your spouse that you owe more money. They also include having received notification from the IRS about a problem with your joint return.

Notice can also include a lawsuit filed against you by the government indicating that you have joint liability or an intent to levy your property. Either way, you may submit the application using IRS Form 8857, Request for Innocent Spouse Relief. Additionally, you can also qualify for Innocent Spouse Relief if the IRS files a claim saying as much in court, or if a court proceeding such as a bankruptcy filing involving you occurs.

One thing that is important for anybody filing for innocent spouse relief to be aware of is that you cannot do so without your spouse being notified of your filing by the IRS. This is even true if you are in the midst of a divorce or have been subjected to domestic violence. You cannot avoid your spouse being informed of your claim.

Next Steps

The idea of your spouse including you in their wrongdoing — and possibly subjecting you to action by the IRS — is enough to put any marriage to a significant test. You may want to seek marriage counseling, or legal action, with regards to how purposeful tax discrepancies impact your relationship. But the question of how it impacts your finances is an entirely different story and one that requires consulting with a tax expert.

Need information on your options and how you should proceed? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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