Innocent Spouse Relief
As a married couple, you probably share almost everything, including your tax liability. Most couples file their return jointly (together) sharing income and deductions. In fact, the government encourages us to file joint returns because, even the average couple saves more when filing jointly (there are exceptions), a couple is an easier target to collect form than two individuals filing separately.
Separate Returns Create Separate Liabilities
The general rule is that if separate returns are filed, the IRS cannot collect against the separate income of a non-liable spouse. If you did not sign or file a joint return with your spouse, then the IRS cannot collect from you. (However, we’ll get to the exception to this rule in later for those of you living in Wisconsin, California, Arizona and other community property states).
But if you file jointly, then the general rule is that by both spouses signing the return, you and your spouse create a joint tax liability. Joint liability is collectible from all property and rights to property whether you have sole (separate) ownership or whether you and your spouse own the property together (jointly). See Code Section 6013(d)(3) and Butler v. Commissioner, 114 Tax Court 276.
How to Escape Liability When Joint Returns are Filed
However, even if a joint return is filed, the IRS has innocent spouse rules to protect those spouses who are innocent. The broad definition of innocence is that the innocent spouse did not know or did not have reason to know of the liability and the innocent spouse received no benefit from the unpaid taxes. If you can establish innocence, the IRS will not collect from the innocent spouse even if a joint return was filed.
To prove you are an innocent spouse, you are going to be using IRS Form 8857, Request for Innocent Spouse Relief. To be granted relief from the IRS, you will need to establish four facts:
- The tax liability is due to an erroneous item. For example, unreported income and an invalid deduction are erroneous items.
- You did not know or have reason to know about the erroneous item.
- Based on all the facts and circumstances, it is unfair to hold you liable for the tax. This is factor is usually the make or break factor, and you must use clear and convincing evidence to establish this fact.
- The request for innocent spouse relief must be timely. It must be filed within two years after the IRS first begins collection against you.
What if You are Divorced or Separated?
What do you do when you become divorced or legally separated after filing a joint tax return that reports tax liability, but is not paid during the marriage? I see this a lot where in the case of divorce or separation one spouse is ordered to pay the taxes, but it’s not paid and the innocent spouse is left holding the bag for the ex-spouse.
Now, under these facts the innocent spouse relief explained earlier – where both spouses are married – is not available because you knew of the tax when you signed the return. However, all is not lost because you can be treated as a “separate taxpayer” by the IRS by terminating your joint filing status and separate yourself from your ex-spouses unpaid tax debt.
You do not need the consent of the ex-spouse either. Now this strategy does not relieve you of all tax liability, just that share that your spouse would have been required to pay if he had filed separately from you. You still pay your share of the tax from your income.
Again, use IRS Form 8857, Request for Innocent Spouse Relief. You wil use Part III of the form and you will be required to prove the following facts:
One. At the time of submitting the request, you must be divorced or legally separated. If you’re not divorced or legally separated, you can still qualify by establishing that you have been living with your spouse at any time during the last 12 months before you filed the request. Divorce documents and affidavits will need to be submitted to the IRS to prove up this fact.
Two. Show your separate income, wage withholding, other payments as credit against the tax, and your share of itemized deductions. You can attach this to Form 8857.
Three. There can be no fraudulent transfers of assets between spouses prior to the divorce or separation. For example, the husband transfers all property to the wife and then files for divorce. The wife files a separate taxpayer request. The husband is left with his tax liability, but he has no property against which to collect. The IRS won’t allow that if it can prove the transfer was made before divorce or separation to defeat collection.
The Safety Net Innocent Spouse Remedy
If you cannot obtain relief under the two remedies just discussed, there is another innocent spouse remedy. This is found under Code Section 6015(f) and it give the IRS broad discretion to look at each case individually, and determine whether based on all the facts and circumstances of your case, it is unfair to hold you responsible for paying the tax, even if you filed the return jointly.
Key factors the IRS will consider are whether you were abused by your spouse, whether you are currently divorced or separated, whether you would suffer economic hardship, whether you filed the return with intent to defraud, whether you benefited from your spouse’s wrongdoing, etc.
Community Property States and Innocent Spouse Relief
In states like Wisconsin, California, Arizona, Nevada, Texas, Idaho, Louisiana, Washington, and New Mexico, which are considered “community property” states, an innocent spouse may run up against a problem even in cases where the returns were filed separately. This happens because community property spouse laws give each spouse an equal ownership interest in the wages and income of the other spouse.
So, for example: a wife in a community property state files a separate tax return disclosing her income, but the husband fails to file a return. Later, the IRS catches up with the non-filing husband and determines that the non-filing husband has taxable income. The IRS will assign one-half of the taxable income of the non-filing husband to the filing spouse wife.
There are two remedies for the filing spouse:
The first is to amend the return. The wife could reduce her income by attributing one half of her income to her husband, and thus reduce her tax liablity.
The second remedy is if the three years to amend the return has elapsed. You can file Form 8857 and file it along with a detailed affidavit. The affidavit must establish that you did not file a joint return, the income was the separate income of your husband, and taking into consideration the facts and circumstances, it is unfair to hold the wife liable for the husband’s tax.
Right to Appeal Innocent Spouse Decisions
United States Tax Court provides potential relief if you were denied innocent spouse relief by the IRS. Within 90 days of being denied innocent spouse relief by the IRS, you can file a petition with the United States Tax Court seeking a review of the IRS’s denial of relief. By the way, within the 90 day period from final determination of the IRS denying innocent spouse relief to the time you appeal to U.S. Tax Court, the IRS cannot take collection against you.
If You are An Innocent Spouse – Call Attorney Michael Mack
If you need help with obtaining innocent spouse relief, just give Michael Mack a call for FREE at 800 659 0525. I can definitely help you with innocent spouse relief or just about any tax problem.