Innocent Spouse Relief – How to Sever Your Joint Tax Liability with Your Spouse (or Former Spouse)
As a married couple, filing a joint return can yield a huge tax benefit. If you file separately, often you end up owing more. Congress placed limits on certain deductions and credits for married folks who file separate. Thus filing jointly is usually the best way to go. The only wrinkle with filing a joint return is joint and several liability.
What is Joint and Several Liability?
Filing a joint return means you and your spouse are making an irrevocable election to both be 100% liable for any taxes due. There are no take-backsies (as the kids say). It also does not matter what share of the taxes due is your responsibility. If, several years later, the IRS audits your joint tax return then you both are equally liable for any additional taxes. The IRS can collect the taxes due from you both, regardless of whether or not you stay married. The IRS also doesn’t have to consider fault, income or assets of each party; it can choose who to pursue for unpaid taxes in any way it chooses.
Well, what happens if your spouse was less than honest on the joint return? For example, your spouse omitted income or claimed deductions he should not have. By filing a joint return, you are still both liable even for a spouse’s bad behavior. Unless you can get some relief from that joint and several liability. More on that in a moment. So if your spouse engages in bad behavior, barring some relief, the IRS can chase after you both for any unpaid taxes, regardless of whether you stay married or not. How do you break this chain? Innocent spouse relief.
What is Innocent Spouse Relief?
Innocent spouse relief is an IRS program set up to decide on a case-by-case basis whether to allow a taxpayer relief from joint and several liability. In this post, I will just give you a brief overview. Later posts will discuss the particulars.
Innocent spouse relief is not given for every jointly filed return. Generally, you can only qualify for one of two reasons. One, there must be an erroneous item on your tax return that resulted in an understatement of the tax due. Or, two, the tax return was properly filed but a balance due remains. In my next blog, I will go into more detail about erroneous items and a balance due return.
Innocent spouse relief is an umbrella term for three different types of relief:
- Innocent spouse relief (redundant, I know),
- Separation of liability relief, and
- Equitable relief.
Innocent spouse relief – is used when there is an understatement of tax due to your spouse or former spouse failing to report income, reporting income improperly, or claiming improper deductions or credits on your joint return (these are called erroneous items). You can only qualify for this relief if you were not aware, and had no reason to know, of these erroneous items. Additionally, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax.
Separation of liability relief – is used to when there is an understatement of tax to split the tax liability between you and your former spouse. To qualify, you must not have been aware of the erroneous items on the return.
Equitable relief – only applies if innocent spouse relief and separation of liability relief do not apply. Relief can be granted under this program for either an understatement due to an erroneous item or for an unpaid tax liability. Equitable relief has certain threshold conditions that must be met (to be discussed in another blog post). if you meet these threshold conditions, the IRS may grant relief if you can establish that it would be unfair to hold you liable for the understated or unpaid taxes.
I have explained joint and several liability as well as the three forms of relief. Next post, I will discuss how to know if your case qualifies for innocent spouse relief.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.