For those who are married and filing income tax returns jointly, the situation may arise where an unreported item or error on a joint return can cause the IRS to notify you of a tax debt due. Either spouse may be held responsible for the entire debt, even if one spouse had no knowledge of the issue. Fortunately, there are relief options available for spouses who are not responsible for the debt. This is known as innocent spouse relief.
8 Things You Need to Know About Innocent Spouse Relief
- Taxes, Penalties, and Interest
- Joint and Several Liability
- Actual Knowledge or Reason to Know
- Statute of Limitations
- Notification of Spouse or Former Spouse
- Factors the IRS Considers
- Community Property Laws
- Alternative Relief Options
Who Qualifies for Innocent Spouse Relief?
The Internal Revenue Service (IRS) oversees the collection of taxes from taxpayers across the United States. Married couples often find it beneficial to file a joint tax return in order to claim certain deductions and credits. Signing and filing a joint income tax return binds the spouses in responsibility for paying any tax debt that may arise from erroneous items or underpayment of taxes.
What is innocent spouse relief? In cases where one spouse is responsible for the erroneous items and it would be unfair to hold the other spouse liable for the debt, the IRS offers the possibility of relief from joint liability. Innocent spouse relief only applies to individual income and self-employment taxes.
To qualify for innocent spouse relief, you must have first filed a joint tax return that was completed incorrectly or involved an underpayment of income tax. You must also claim the other spouse is solely responsible and be able to establish that there was no actual knowledge or reason to know about the error. Next, it must be judged unfair to hold the innocent spouse responsible for the debt. Finally, there must not be any fraudulent activity on the requesting spouse’s side. There are many other factors that may impact your ability to obtain different types of relief from a tax debt.
How Does Innocent Spouse Relief Work?
Once you determine that you owe a tax debt from a joint tax return and that you may be eligible for innocent spouse relief under tax laws, you can file a relief request with the IRS. To file for innocent spouse relief, use IRS Form 8857 (Innocent Spouse Relief Request). This form covers multiple years, and you can also choose to send in additional supporting documentation, such as an IRS innocent spouse relief letter. If you think you may be eligible, it is best to file a request as soon as possible, since there are time constraints when seeking this kind of aid. Generally, you have 2 years from the time the IRS first notifies you of tax liability, although this time is reduced in states that use community property laws.
The IRS will consider any submitted documentation, along with Form 8857, and make a determination based on several factors. These factors include considering the requesting spouse’s education or business experience, work experience, level of involvement, physical or mental disabilities, and current marital status. They will also check to see if the requesting spouse received any significant benefit from the erroneous items.
The requesting spouse may be relieved of full or partial responsibility for paying interest and penalties. In some cases, the innocent spouse may be able to obtain a refund on payments already made towards the debt.
1. Taxes, Penalties, and Interest
The IRS assesses heavy penalties for failing to file or pay taxes on time. Multiple penalties can apply to the unpaid tax, such as a late-payment penalty, in addition to a failure-to-file penalty. Interest rates increase monthly and are calculated quarterly but are compound daily. This can quickly increase the amount owed as interest starts from the date the debt was originally due–even years earlier–and continues until the debt is paid.
2. Joint and Several Liability
Married couples can elect to file jointly or separately. Filing jointly allows for some benefits but also shares the liability between the spouses. The IRS considers jointly-filing spouses to be “jointly and severally liable” for the tax debt. This means the IRS can hold either spouse fully responsible for the whole amount, even if one spouse had no idea of the erroneous items being claimed.
3. Actual Knowledge or Reason to Know
An innocent spouse must be able to prove that they had no actual knowledge of the understatement or error–and no reason to know, either. If a reasonable person in similar circumstances would have known about the understatement, you may not be eligible for relief. You will have a legal obligation to pay the income tax liability. There is an exception to this rule for spouses who may have been subject to domestic abuse prior to signing the joint return if they did not challenge their spouse for fear of retaliation.
The IRS will also consider the nature of the erroneous items and other factors to determine if you could have reasonably known about the issues in question. They examine the nature of the underpayment or error, your current financial situation, educational and business experience, and whether you failed to ask questions or raise concerns. The IRS will also compare previous tax returns to look for changes in regularly reported items.
4. Statute of Limitations
Generally, the IRS can pursue a taxpayer for the collection of a tax debt for 10 years. Once the IRS notifies you of a collection for taxes due on a jointly filed tax return, you have two years to attempt to submit an innocent spouse claim for a given tax year. However, you have less time in certain states that follow community property laws.
5. Notification of Spouse or Former Spouse
When a spouse requests relief from a joint tax debt under the innocent spouse rule, the IRS must alert the other spouse. If the relief measure is approved, the non-requesting spouse would then become responsible for the entire debt. The IRS must alert the non-requesting spouse by law, even in cases involving domestic dispute. In some cases, the dispute over the responsibility of a liability can lead to tax court. However, the IRS will not release your personal information, such as current address and phone number.
6. Factors the IRS Considers
The Internal Revenue Service will consider many different factors to determine eligibility for innocent spouse relief. Has there been a change in relationship status since that joint return in question was filed, such as a divorce, separation, or abandonment? The nature of the erroneous items, dollar amount due, and current financial situation will also be examined. Another major consideration is if the requesting spouse received significant benefit from the under reported or erroneous items. This benefit can occur or be received many years after the tax year in question. The IRS will also look for transfers of property between spouses to determine the possibility of a fraudulent scheme.
7. Community Property Laws
Some states support community property laws in which both spouses share property equally. This can complicate ownership and impact a spouse’s chances of obtaining innocent spouse relief. States with community property laws include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. However, living in these states doesn’t mean you are ineligible to apply for innocent spouse relief. You may still apply but remember there are reduced time frames for submitting a request for relief in these states. You would still file IRS Form 8857, but you must submit it no later than 6 months before the expiration of the period of limitations on assessment.
8. Alternative Relief Options
The IRS may determine that you are not eligible for the innocent spouse relief rule and therefore are responsible for the associated tax debt. In some cases, you may receive partial relief while being responsible for the rest. An IRS ruling on an innocent spouse request is final–with few exceptions. If you are ineligible or are denied relief under the innocent spouse rule, then you may qualify for alternative relief options, such as equitable relief or separation of liability relief. You might even be able to consider an Offer in Compromise Doubt as to Liability in which you can negotiate the amount due with the IRS. It is important to know you have options, even if there is already a tax levy against you. To discover the best option for your particular situation, it’s always best to reach out to an experienced tax lawyer.
How Does Innocent Spouse Relief Differ from Injured Spouse Relief?
It may be easy to confuse innocent spouse relief with another form of relief known as injured spouse relief; however, they address different issues. Innocent spouse tax relief offers removal of liability on a tax debt from unreported or erroneous items. In contrast, injured spouse relief is aimed at allowing a spouse to reclaim their portion of a refund from a joint tax return.
When considering innocent spouse relief vs injured spouse relief, the injured spouse may still be married and filing jointly. The IRS can withhold a tax refund to satisfy a tax debt, such as those arising from defaulted student loans, unpaid child support, and old tax bills. If a spouse has their portion of a return withheld to satisfy their spouse’s debt, they can request injured spouse relief to attempt to reclaim their refund due. An injured spouse would file IRS Form 8379 (Injured Spouse Allocation). This form can be filed with the couple’s joint income tax return.
Innocent Spouse Rule
Discovering you owe a rapidly increasing tax debt to the government can be unsettling. To make matters worse, the IRS applies hefty penalties and interests and will take collection actions to satisfy the debt. This can lead to a federal tax lien or levy, in which the IRS seizes assets to satisfy the debt.
Filing a joint return as a married couple offers advantages, but also places both spouses jointly and severally liable for any tax debt. Signing a tax return also signifies that you approve of the contents of the income tax return. To be eligible for innocent spouse relief, you must be able to prove that you did not have actual knowledge–or any reason to know–of the issues in question.
It is important to note that requesting innocent spouse relief requires the IRS to alert the other spouse, even in cases of spousal abuse (though contact information remains confidential). Then, when the IRS considers your Innocent Spouse Relief Form 8857, they will take into account a variety of related factors. These factors include your financial situation, relationship status, education, and business background, as well as examine filing patterns across multiple years.
Some states, such as California and Texas, follow community property laws which split ownership equally between married couples. Taxpayers in these states have reduced time frames to file requests for relief and may have more difficulty applying. If you are denied innocent spouse relief, it is important to know you may be eligible for another relief option such as equitable relief.
Consulting with an experienced tax attorney can greatly help increase your chances of obtaining relief from a tax debt. At Acadia Law Group, we can help collect and submit the necessary documents, as well as help navigate timelines for applying and appealing IRS decisions. If you have any questions or think you may be eligible for IRS innocent spouse relief, reach out to the professionals at Acadia Law Group today.