What is “Innocent Spouse 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.
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.
1. Traditional Innocent Spouse Relief
Traditional innocent spouse relief 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.
In order 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.
2. 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.
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.
3. 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.
It 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.
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You are welcome to call our Atlanta-based accounting firm at 678-235-5460 to discuss your tax questions. We work with individuals and small businesses throughout Georgia.
Founded by Gary Massey, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation before the IRS and state taxing authorities, audits, monthly bookkeeping, and accounting.
Our office is in the Buckhead – Sandy Springs area of Atlanta, which is an advantage to those looking for a local firm to handle their tax matters.