Innocent Spouse Tax Relief

You're probably thinking your estranged or ex-spouse is not innocent of anything. That might be true, but if this applies to you, read carefully!

On a Joint Return both spouses are liable for any tax owed to the IRS, but in extenuating circumstances, one spouse may be able to avoid that tax liability. The IRS has a procedure that has come to be known as the "Innocent Spouse Doctrine." This tax doctrine could allow a spouse to be excused from liability for taxes and tax penalties as well.

In 1998 the tax law definition of "Innocent Spouse Relief" was broadened. This law allows for tax relief for those spouses that filed joint tax returns but can now demonstrate that it would be unfair for the IRS to expect both parties to be equally responsible for the joint tax liability. Surprisingly, it’s not unusual for a spouse to be relieved of any responsibility to the IRS for the tax, interest, and penalties on a joint tax return, if they can prove they had no knowledge of any wrongdoing.

The main reason to file a Joint Return is because of the benefits allowed. The catch to the return is that both taxpayers are jointly and individually responsible to the IRS for any tax, and any interest or penalties that might become due on the joint tax return. Sad news is that this applies even if the couple divorces after the return is filed. Remember the IRS has three years to forever to investigate a filed return.  Now for you legal types this applies even if a divorce decree states that a former spouse will be responsible to the IRS for any tax amounts due the IRS on previously filed joint tax returns. The reality is that one spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. Now think about it, if your spouse is a dead beat and didn’t pay his taxes and you are rebuilding your life and have a good job, who do you think the IRS would go after?

Here are the conditions you must meet to qualify for innocent spouse relief.

You filed a joint tax return with the IRS and that return has a substantial understatement of tax directly related to grossly unreported taxable income, or there were incorrect tax deductions, tax credits or tax basis provided by your spouse. This unreported taxable income is any gross taxable income item received by your spouse that is not reported on the tax return filed with the IRS.

Additionally, incorrect tax deductions, tax credits or tax basis are ANY tax deductions, tax credits or tax basis of property claimed by your spouse on the tax return for which there is no basis in fact or tax law. Simply put, it’s income that he/she did not report and deductions that he/she took that were not legal or non-existent!

You must establish to the IRS that at the time you signed the joint tax return and filed it with the IRS you did not know, and had no real reason to know, that there was a substantial understatement of income or tax. Thus, taking into account all the facts and circumstances, it would be unfair for the IRS to hold you liable for the understatement of tax.

The tax law does not provide relief for an unpaid balance due shown on a tax return.

The form you would use to request this relief is IRS Form 8857

This all seems complicated but it’s really as simple as this. If your spouse was cheating on his or her taxes and you knew nothing about it, but the IRS is now trying to hold you accountable, go for this relief. Your money and assets depend on it!

How to Attract an Income Tax Audit