IRS Innocent Spouse Tax Relief

Tax liabilities are shared by both spouses if they file their returns jointly. This means that even when a relationship hits a rough patch or is severed, both partners will continue to be held responsible for any tax dues arising from faulty filing. If you find yourself at the receiving end of the Taxman’s wrath because of an error committed by your spouse, there is scope for respite in the form of IRS Innocent Spouse Tax Relief.

Joint filing of taxes, good or bad?

IRS statistics show that only about 1.35 million couples choose to file their taxes separately while almost 54 million returns are filed under the ‘marital joint tax’ category. Of course, there are many advantages to joint filing, particularly if there is disparity in the earnings of both spouses and one partner makes significantly less than the other. In this scenario, the couple will end up paying less overall.

So, where is the problem?

In simple words, the implications of joint tax filing are that the liability will be several and joint. This means that if your spouse is untraceable, the IRS can and will come after you for 100% of the tax debt, even if you were not earning while you were married. The liability not only extends to declared earnings but also to hidden income. For instance, if your ex made a killing at the tracks or at a casino but neglected to tell you about this, you will be held accountable for the tax liabilities on this earning

What is the solution?

A preventative measure is to keep a close watch on your tax filings even if your spouse is handling the books and if you are not employed. However, if you already find yourself facing the music for your ex partners misdeeds, you could claim relief under the innocent spouse rule of the IRS.

Why is this the right time for tax relief for innocent spouses?

Till about 2011, the IRS limited the time in which tax relief could be sought by innocent spouses to 2 years. However, in the last three years, at least for equitable relief, this period has been extended to ten years. The benefits of this are available to those who want to request relief in the future as well as to those who were denied relief because they did not file for it within the stipulated period.

Relief to innocent spouses can be granted in three ways!

  • General innocent spouse relief: This is the highest level of indemnity that can be granted to a spouse and the one that everybody is hoping for. If you get general relief, you will be exempted from all tax responsibilities arising from improper reporting of income as well as failure to report income by your spouse.
  • Separation of Liability: In this form of relief, the tax debt is allocated between both spouses. If you receive relief under this rule, you will still be liable to pay half or more of what is owned.
  • Equitable relief: This option is considered when a taxpayer does not qualify for general relief or separation of liability

Grounds for being granted innocent spouse tax relief

IRS Code 6015 has information on the 8 factors that are weighed when the request for tax relief is considered:

  1. Status of relationship: Whether the taxpayer requesting the relief is separated or divorced
  2. Economic status: If the innocent spouse would be made to suffer economic hardships if held responsible for paying the tax debt
  3. Knowledge of tax fraud: An all important consideration, this is where a determination is made on whether the spouse claiming innocence had knowledge of the tax discrepancies or had reason to know about this.
  4. The legal obligations of the non-requesting partner: If the partner who is not requesting the relief is legally accountable for paying the outstanding tax payments, pursuant to a divorce ruling.
  5. Significant benefit: If the requesting spouse received significant benefit from the earnings on which the taxes were due or from the unpaid tax liability itself.
  6. Tax law compliance: Whether the requesting spouse has a good standing with the IRS
  7. Abuse victim: If the requesting partner was abused by the non-requesting spouse
  8. Mental and physical health status: Finally, it will be also be analyzed if the requesting partner was in poor or unsound mental or physical health when the joint return was filed.

Who can qualify for IRS Innocent Spouse tax Relief?

To qualify for relief, you will need to meet certain conditions such as:

  •  Must have filed returns jointly which involve the understatement of income
  •  The error should have been committed by the non-requesting partner
  •  You must be able to establish that when the joint return was signed you did not have knowledge and had no reason to know about the erroneous reporting of income
  •  You can offer reasons as to why it would be unfair to hold you accountable for such tax dues
  •  Request for general relief and separation of liability has to be filed within 2 years after the IRS initiated collection proceedings against you.

If you are denied IRS Innocent Spouse Tax Relief, it would not make sense to reapply hoping to qualify for equitable relief. The process of consideration goes in three steps where the applicant is first considered for general relief, then for separation of liability and finally for equitable relief. The only hope for people who do not qualify for tax indemnity under the innocent spouse rule is to approach the US Tax Court.

Jag Tax Relief