Understanding Joint Tax Returns and Innocent Spouse Relief in Divorce

Filing joint tax returns during a divorce? Here’s what you need to know about protecting yourself from unexpected tax liabilities related to joint tax returns and Innocent Spouse Relief.

In most divorce cases, filing joint tax returns proves more financially beneficial for both parties, whether it helps secure a refund or reduce tax liabilities. Any refund the couple receives or payment they owe becomes a part of the marital estate. When spouses file jointly, they both share responsibility for any taxes, interest, or penalties owed. This is true, even if there is a final divorce agreement entered by the Court with language that says one spouse might not be responsible for any liabilities of debts owed on joint tax returns. This is also true even if your spouse made all of the income for both of you. Your divorce judgment, unfortunately, does not protect you from tax liability, even if it explicitly states otherwise.

Tax Liability and Divorce Agreements

Filing joint tax returns often benefits both parties financially in most divorce cases, either by securing a refund or reducing tax liabilities. Any refund received or payment due becomes part of the marital estate. Both spouses share responsibility for any taxes, interest, or penalties when filing jointly. This shared responsibility applies even if the final divorce agreement states that one spouse is not responsible for debts on joint returns. It remains true even if only one spouse earned all the income. Unfortunately, your divorce judgment does not protect you from tax liabilities, even if it explicitly states otherwise. What exactly is an “understatement of tax” and how can you avoid liability?

What Is an Understatement of Tax in Joint Returns?

The IRS defines an “understatement of tax” as the difference between the total amount of tax that should have been shown on your return and the amount of tax that shows on your return. “Erroneous items” may consist of either unreported income, an incorrect deduction or credit, or, an incorrect value used for assets. In determining whether it is unfair to hold you responsible for the understatement, the IRS will consider whether you received any significant benefit from the understatement of tax, or whether you were divorced from or deserted by your spouse.

How Innocent Spouse Relief Protects You During Divorce

In 1998, the Internal Revenue and Reform Act made it easier for an innocent spouse who signed a joint return to avoid responsibility for the total tax due to be paid to the IRS. According to Internal Revenue Code section 6015(b), an innocent spouse will be relieved of an understated tax liability on a joint return when he or she did not know or have reason to know of the understatement, and it would be inequitable to hold the spouse responsible.

Requirements Qualify for Innocent Spouse Relief

To qualify for innocent spouse relief, you must meet ALL of the following requirements:

1. You filed a joint tax return which has an understatement of tax due to erroneous items of your spouse;
2. You establish that at the time you signed the joint return, you had no reason to know that there was an understatement of tax; and
3. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.

Innocent spouse relief can be demonstrated through financial records and any other documentation that the spouse may have. The IRS reviews each relief case on an individual basis. Factors ranging from someone’s education to changes in someone’s spending habits can impact how the IRS responds to such requests.  Keep in mind that the innocent spouse relief is designed only for cases where the taxpayer underpaid or understated the tax due, not where the taxpayer paid the tax in full. The IRS will only accept requests for innocent spouse relief after a taxpayer receives a notice of audit or other notification of potential liability. The taxpayer must file the request for innocent spouse relief no later than two years after collection efforts begin. If the IRS denies the petition for relief, the taxpayer then has ninety days to petition the Tax Court.

Conditions and Exceptions for Innocent Spouse Relief

If the IRS determines that you do not meet all the required conditions for innocent spouse relief, there are two other instances in which a spouse may be relieved of the tax, interest, and penalties on a joint return. These two types of relief are “separation of liability” and “equitable relief.”

Relief by Separation of Liability

This relief, if granted, allows you to divide the understatement of tax on your joint return between you and your spouse (or former spouse). The understatement of tax allocated to you will be the amount of tax for which you are responsible. To request relief by separation of liability you must meet the following requirements:

1. You filed a joint return; and
2. You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief; OR
3. You were not a member of the same household as the spouse with whom you filed the joint return at any time during the twelve months ending on the date you filed Form 8857 (request for innocent spouse relief).

However, the IRS only grants this relief in specific situations:

• If they can determine that you and your spouse transferred assets as part of a fraudulent scheme to avoid paying taxes on that transfer.
• If they can determine that at the time you signed the joint return you had actual knowledge of any items giving rise to the deficiency that were allocable to your spouse.
• If they can determine that your spouse or former spouse transferred property to you to avoid tax or the payment of tax.

So, if you had any knowledge of an attempt made by your spouse, either involving you or not, to try to avoid paying taxes, the IRS will not grant the relief you are requesting.

Equitable Relief

The IRS does allow a third type of relief from tax liability for spouses who do not qualify for the two other previously mentioned types of relief. This is called equitable relief, which may be available if you meet all of the following conditions:

1. You are not eligible for innocent spouse relief or relief by separation of liability;
2. You and your spouse did not transfer assets to one another as part of a fraudulent scheme;
3. Your spouse did not transfer assets to you for the main purpose of avoiding tax liability;
4. You did not file your return with the intent to commit fraud;
5. You did not pay the tax; and
6. You establish that taking into account all of the facts and circumstances. It would be unfair to hold you liable for the understatement or the underpayment of tax.

Unlike innocent spouse relief or relief by separation of liability, it is possible to obtain equitable relief from either an understatement of tax or an underpayment of tax. The IRS defines an underpayment of tax as an amount of tax that you properly reported on your tax return but that you have not paid. If you are separated or already divorced from your spouse, the IRS will consider it as a positive factor in favor of you obtaining equitable relief.

Exceptions for Victims of Domestic Abuse

If you do not qualify for any of the three types of relief mentioned above, and you are a victim of domestic abuse by your spouse, you may have one final remedy available to you. This remedy is available even if you knew or had knowledge about the errors on the tax return. You may be eligible for relief as an innocent spouse if you were a victim of domestic violence if you meet the following conditions:

1. You were the victim of spousal abuse or domestic violence before signing the tax return; or
2. You did not challenge the items on the return due to fear; or
3. You signed the joint return because you were pressured or threatened.

Whichever relief you are requesting, remember that you must request Innocent Spouse Relief within two years of receiving an IRS notice of an audit or taxes.

For more information regarding innocent spouse relief and how to apply for relief, visit the IRS website and IRS Publication 971.

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Consulting Your Attorney: Navigating Tax Complications in Divorce

If you face tax issues in your divorce, the Court may consider these when dividing the marital estate. A spouse who lied on taxes to deceive their partner can seriously damage their credibility in court. If a spouse misused marital funds for unrelated purposes instead of settling tax debts, the court could order them to reimburse you for half of those funds. Discuss your options with your divorce attorney if you face an innocent spouse-related tax issue.