Innocent Spouse: Eligibility and Types of Relief

Married couples usually file a joint tax return. They do this because joint tax returns generally offer greater tax benefits. However, the extra benefits of the joint tax return come at the price of joint liability. This means that either spouse is liable for the tax, whether from the filing of a joint return or a subsequent IRS audit, which can result in additional taxes due to financial misreporting.

Furthermore, the husband and the wife are each liable for the tax even if they later get divorced.

In our Atlanta, Georgia accounting firm, we regularly meet with individuals who filed a joint tax return with their ex-spouse and now wish to absolve themselves of joint responsibility for the tax. The IRS offers a solution for these cases: “Innocent Spouse Relief.”

Innocent spouse relief comes in three forms, as discussed below. It is the responsibility of the CPA to determine which of these three forms is applicable based on the facts of the case.

Eligibility for Relief

To be eligible for innocent spouse relief, you must meet certain requirements. These requirements are designed to ensure that you are not held responsible for your spouse’s or former spouse’s tax errors or omissions.

Basic Innocent Spouse Relief

Traditional innocent spouse relief, also known as the innocent spouse rule, is applicable when there is something incorrect or missing on a joint tax return and making the correction creates a tax liability. The innocent spouse argues that he or she did not know, or had no reason to know, about the incorrect or missing item that triggered the tax. Penalties resulting from these erroneous items can also be addressed under this rule, providing relief from tax, interest, and penalties if certain conditions are met. The IRS considers all relevant facts and circumstances when determining whether to grant traditional innocent spouse relief.

In order to provide relief, the IRS must determine that it is inequitable to hold the innocent spouse responsible for the tax on the incorrect or missing item.

The innocent spouse is required to request relief within two years of the start of IRS collections on the tax debt.

If the IRS grants innocent spouse relief, the tax liability is allocated between the spouses, with the missing or incorrect income allocated to the other spouse. Therefore, innocent spouse relief usually does not wipe out the tax completely for the taxpayer. It only provides relief for the portion of the tax that is allocable to the incorrect or missing item of the other person.

Separation of Liability Relief

As with traditional innocent spouse relief, separation of liability relief is applicable when there is something incorrect or missing on a joint tax return and making the correction creates a tax liability. Here too, the taxpayer argues that he or she did not know, or had no reason to know, about the incorrect or missing item that triggered the tax. Even if a divorce decree states that one party is responsible for the taxes, the IRS can still hold both individuals, including a former spouse, jointly liable for tax obligations incurred during the marriage. This includes any additional taxes that may arise from unreported income and erroneous deductions.

Separation of liability relief requires that the spouses must be divorced, legally separated or not members of the same household for at least 12 months.

Separation of liability relief must be requested within two years of the start of IRS collections on the tax liability.

If the IRS grants separation of liability relief, the individuals will be treated as having been married but filed tax returns separately. The tax debt will be allocated based on who earned the income, or who owned the assets that are the source of income.

Usually, separation of liability relief provides a better answer for our Georgia clients than traditional innocent spouse relief.

Equitable Relief

Equitable relief is unique in that it applies to an understatement of income due to a missing or incorrect item on a joint tax return, as well as a tax that is correct but unpaid.

There is no requirement to file for equitable relief within two years.

The IRS looks at many factors when deciding to grant equitable relief. These factors include marital status, economic hardship, knowledge or reason to know, abuse, physical or mental health, and financial control. The IRS also considers the taxpayer’s financial situation, including economic hardship, when deciding to grant equitable relief.

If the IRS grants equitable relief, the tax liability will be allocated between the spouses.

Injured Spouse Relief

Injured spouse relief is distinct from the other categories of relief mentioned above.  This type of relief applies when a married couple files a joint tax return and a portion of a tax refund is taken by the government to pay a liability of one of the spouses.

For example, injured spouse relief may apply where the IRS takes part of a tax refund from a joint return to pay past due child support from a previous marriage of either the husband or the wife.  If injured spouse relief is granted, the IRS will return the injured spouse’s portion of the tax refund.

Requesting Relief and Meeting Requirements

To request innocent spouse relief, individuals must file Form 8857 with the IRS, especially if the tax liability is due to erroneous items reported by a former spouse. The form must be filed within two years of the date the IRS first attempted to collect the tax liability, unless the individual qualifies for an exception.

To meet the requirements for innocent spouse relief, individuals must provide documentation and information to support their claim. This may include:

• A copy of the joint tax return that contains the erroneous items.
• Documentation to support the individual’s claim that they did not know or have reason to know of the erroneous items.
• Documentation to support the individual’s claim that they did not benefit from the erroneous items.
• Documentation to support the individual’s claim that they did not participate in a fraudulent transfer of property.

Appealing a Decision

If the IRS denies an individual’s request for innocent spouse relief, the individual has the right to appeal the decision. The appeal must be filed within 30 days of the date the IRS mailed the determination letter.

When appealing, it is important to address any penalties resulting from erroneous items reported by a spouse, as relief may be granted if certain requirements are met and the individual was unaware of the inaccuracies.

To appeal a decision, individuals must file Form 12203 with the IRS. The form must include a statement explaining why the individual disagrees with the IRS’s determination and any additional documentation or information to support their claim.

The IRS will review the appeal and make a determination based on the information provided. If the IRS upholds the original determination, the individual may have the right to further appeal the decision to the U.S. Tax Court.

Video on Innocent Spouse Relief

If you would like to learn more about the topics covered in this article, check out our video on YouTube.  Here is the link: our video on Innocent Spouse Relief.

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Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country.  Our services include tax return preparation, tax planning for businesses and individuals, estates and trusts, IRS tax problem resolution, IRS audits, sales taxes and small business accounting and bookkeeping.