A husband and wife are generally liable jointly and individually for the tax on a joint return. The question then becomes whether the innocent spouse, who merely signed a joint return, should be held liable for errors on the return caused by the other spouse’s actions. The question becomes even more critical if the couple has divorced and the government is attempting to collect from the income of the innocent spouse.
For tax liabilities arising prior to July 22, 1998, an “innocent spouse” could be relieved of the tax liability only if certain specific innocent spouse requirements were met. Effective for any tax liability arising on or after July 22, 1998, and for any unpaid tax liability, the IRS applies a less strict set of requirements to obtain innocent spouse tax relief. These standards make it easier to qualify for innocent spouse IRS relief and to prevent abuse of the innocent spouse. To obtain innocent spouse tax relief, one must now elect the form of relief sought within two years of the IRS beginning the tax deficiency or assessment collection. The types of innocent spouse tax relief is available to the electing spouse are: Innocent Spouse IRS Relief, Separation of Liability, and Equitable Tax Relief.
Any innocent spouse determination by the IRS is reviewable in tax court. Notice of the election for innocent spouse tax relief must be given to the non-electing spouse who may participate in any hearings on the relief requested.
Election 1 – Innocent Spouse IRS Relief
To qualify for the innocent spouse tax relief election, the taxpayer must meet all the following requirements:
- Filed joint return which has an understatement of tax due to erroneous items
- Establish that the at the time of signing the tax return the taxpayer did not know, or have any reason to know, there was an understatement of tax
- Taking into account all the factors and circumstances it would be unfair to hold the innocent spouse liable.
In determining whether to grant innocent spouse tax relief, a key element of the IRS will be whether the electing spouse received any substantial benefits or later was divorced, separated from or was deserted by the other spouse.
Election 2 – Separation of Liability
The innocent spouse may elect to obtain relief by separation of liability. To qualify, an individual must have:
- Filed a joint return, and either
- Be no longer married to, or be legally separated from, the spouse with whom the joint return was filed or
- Must not have been a member of the same household with the spouse for a 12-month period ending on the date of the filing of the request for innocent spouse tax relief
Election 3 – Equitable Tax Relief
Suppose the taxpayer fails to qualify for the first two types of innocent spouse tax relief. In that case, one may still obtain innocent spouse relief from the tax liability, interest, and IRS penalties by electing equitable IRS relief. To obtain this type of innocent spouse relief, the taxpayer must show that, under all facts and circumstances, it would be unfair to be held liable for the understatement of underpayment of the taxes. Under the equitable relief provision, the innocent spouse can get relief from tax liabilities caused by the underpaying tax.
Related Topic: Hardship Status