June 10, 2013 | Tax Relief
Innocent Spouse Relief on Jointly Filed Income Tax Returns
Married taxpayers often choose to file joint tax returns because of the benefits this filing status permits, especially tax credits and exemptions. When filing a joint return, both of the taxpayers are liable for the taxes owed, as well as any interest or penalties that might be assessed. Individuals who are married and file joint returns with their spouse and later divorce can still be audited by the Internal Revenue Service or New York State for a return filed when they were married, because it often takes the IRS a year or more before they select returns to audit. Innocent spouse relief is typically for individuals who want to separate their taxes from their ex-spouse and they were unaware that their spouse under paid the taxes on their return.
If the IRS audits a taxpayer and their ex-spouse, both may be found liable and face monetary penalties. For example, the IRS can find unreported income during the audit investigation and assess additional taxes. The income that caused the additional tax belongs to the ex-spouse, but since the income tax returns filed jointly, both spouses can be found responsible. The IRS can choose to initiate collection actions against the taxpayer, their ex-spouse or against both. The IRS usually proceeds against both individuals on an audit for a married filing jointly return. For this situation, there is innocent spouse relief.
Innocent spouse relief is done to separate the taxpayer’s tax liability from their ex-spouse tax liability. With the help of an experienced New York tax lawyer you can completely separate your taxes from those of your ex-spouse, making it clear that the additional taxes, penalties, and interest are their sole tax liability.
Taxpayers may request innocent spouse relief within two years after the date the IRS starts collection activity. Interested individuals must file Form 8857, the Request for Innocent Spouse Relief. The IRS requires that before filing for innocent spouse relief, the married couple who filed jointly must be divorced, legally separated, or living apart for a minimum of twelve months before the filing. New York State follows similar rules in this situation.
Form 8857 does not require multiple forms; one form can cover multiple years. The form should be filed as soon as you are aware that the IRS is increasing your tax liability. This can be done if the IRS sends you a notice, or if the IRS is examining a past return and proposing a tax increase. Filing out the form should be done carefully and preferably with the help of an experienced New York tax lawyer. The request will require documents to be submitted as well, to prove the tax liability should be solely on the ex-spouse.
The innocent spouse relief process is very lengthy, and will last months. After the Form 8857 is submitted to the IRS, it can take up to six months before a decision is made. During this time, the IRS is reviewing the taxpayer’s information, and contacting the non-requesting spouse on the income tax return filed. By law, the IRS must contact the non-requesting spouse, even if there are claims of spouse abuse or domestic violence. The IRS contacts the non-requesting spouse to let them be involved in the process, and will inform them of determinations regarding the request for relief. The IRS does not disclose any personal information that does not related to the determination to the non-requesting spouse.
There are three types of Innocent Spouse Relief as the term is commonly understood:
- General. This type of relief is for taxpayers whose spouse or former spouse failed to report income, reported income improperly or incorrectly claimed deductions.
- Separation of Liability. Under this method of innocent spouse relief, the taxpayer separates their income, deductions, and expenses from their ex-spouses income, deductions, and expenses. With this method, the taxpayer will need the help of an experienced tax attorney who can prove that they are paying the correct amount of joint tax. The tax allocated to the taxpayer is what they are responsible for.
- Equitable Relief. This method is for taxpayers who do not qualify for innocent spouse relief or separation of liability relief for an understatement of tax reported on a joint return.
When the IRS reviews applications for general innocent spouse relief, they consider the information provided. The IRS will require these conditions to be met before a taxpayer qualifies:
- A joint return was filed with an understatement of tax. This understatement is attributed only to the spouse’s erroneous item, which is income received by the spouse but was not included on the joint return. This could also include deductions, expenses, and credits that were incorrectly reported on the return.
- It is established that when the joint return was filed, the taxpayer had no knowledge, or no reason to know that the taxes reported were understated.
- It would be unfair to hold the taxpayer liable for the tax understatement after reviewing the facts and information provided.
To qualify for separation of liability relief, one of the following requirements must be met at the time of the request:
- You are divorced or legally separated from the spouse you filed the joint return with
- You are widowed
- You have not lived in the same household with the spouse you filed the joint return with at any time during the previous year ending on the date Form 8857 is filed.
On May 2 2013, the IRS announced that they were extending benefits to innocent spouses under the equitable relief method. The IRS eliminated the two year time limit that applies to certain relief requests. The IRS will no longer use the two year limit to new equitable relief requests, or requests currently under consideration by the agency. For taxpayers whose equitable relief request was previously denied, solely due to the two-year limit, can reapply with Form 8857, Request for Innocent Spouse relief. This applies only if the collection statute of limitations for the tax year under review has not expired. The two year limit will not be applied to pending litigation regarding equitable relief.
To qualify for equitable relief, the taxpayer must prove that is would be unfair to hold the taxpayer liable for the understatement of the taxes.
Filing for innocent spouse relief is difficult and complex. The taxpayer must be able to document that they are not liable for the understated income, and that the tax liability is the sole responsibility of the ex-spouse. Being able to convince the IRS is not easy, and the guidance of a New York tax lawyer is very helpful.