Innocent Spouse Relief – When to Request Innocent Spouse Relief
When Should You Request Innocent Spouse Relief?
In my previous blog post, I provided a quick overview of what innocent spouse relief is and what it is intended to do. Here I will be discussing when you should consider requesting innocent spouse relief.
Just a reminder, innocent spouse relief is designed to sever the joint tax liability between spouses. So, the question becomes, how do I know if I should request such relief? Glad you asked. Here are some requirements:
- You filed a valid joint 1040 tax return
- The tax debt is the responsibility of both spouses
- The liability is due to either an erroneous item that creates a tax liability or an underpayment of taxes
- NOTE: you are not required to be divorced or separated to obtain innocent spouse relief (except in one instance) but it is helpful.
What are Erroneous Items? Told Through the Story of Jack and Diane
The two grounds for obtaining relief are: 1) is there an erroneous item on the return or 2) an underpayment of tax. The last ground is pretty self-explanatory – did you file a return with a balance due? Erroneous items, however, need some explaining.
Erroneous items come in two general forms: 1) unreported income or 2) an incorrect deduction, credit or basis in an asset. This makes sense. Why should you be held responsible for something that your spouse did or did not do. Here are some examples in case you need a bit more detail. We will use a fictional couple of Jack and Diane to help make it clear.
Jack and Diane file a joint return for 2020. On that return:
- Jack, who is self-employed, inflates his auto expense by $2,000. This is an erroneous item for a fictious deduction.
- Diane, who works as an employee, won $10,000 in Las Vegas but does not report it. Unreported income is an erroneous item.
- Both Jack and Diane claim a child tax credit for their niece, but per the rules she is not her dependent. An improper credit is an erroneous item.
- Jack claims he paid $25,000 for a work truck but in fact paid $12,000. This is an example of an incorrect basis (meaning cost of purchase) of an asset. As Jack will likely claim business depreciation on that truck, this is an example of incorrect basis and thus an erroneous item.
If Diane later seeks innocent spouse relief, she could possibly obtain relief related to the inflated auto expense and work truck’s value. She will not get any relief from her omitted income or the improper child tax credit. We will talk more about erroneous items in later blog posts so don’t worry if you are not quite clear on what it is.
In a later blog post, I will dig into how this all fits together with the (3) grounds for innocent spouse relief. They are traditional innocent spouse relief, separation of liability relief, and equitable relief. Each comes with its own peculiarities so I will dig deep into each briefly and then in more detail. For now, you only need to know that to qualify for innocent spouse relief you need to have 1) filed a joint return with a spouse; and 2) you are liable taxes due from that return related to either an understatement of tax or an erroneous tax item. If you have questions about whether you qualify for not, give us a call.
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 unpaid taxes, 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.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043