Most married taxpayers elect to file a joint tax return because of the benefits that this filing status allows. By filing a joint tax return, both taxpayers are jointly and individually responsible for the tax and any interest or penalty that is due on the return. Liability for the tax to the taxing agency, whether federal or state, for the tax remains, even if a divorce decree or settlement agreement states that a former spouse will not be responsible for the tax, interest, or penalties.
In certain cases, however, a spouse may be able to relieve him or herself from tax liability. 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. In order to qualify for innocent spouse relief, you must meet ALL of the following conditions.
- You filed a joint tax return which has an understatement of tax due to erroneous items of your spouse;
- You establish that at the time you signed the joint return you had no reason to know that there was an understatement of tax;
- Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
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 was actually shown on your return. “Erroneous items” may consist of either unreported income or an incorrect deduction, credit, or basis. 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.
The IRS rejects approximately 40% of all claims for innocent spouse relief, because the party requesting the relief is ineligible. 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.
The IRS also recognizes 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 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. In order to request relief by separation of liability you must meet the following requirements:
- You filed a joint return;
- 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
- 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-month period ending on the date you filed the Form 8857 (request for innocent spouse relief).
The IRS will not grant relief by separation of liability in certain situations. First, where the IRS proves that you and your spouse transferred assets as part of a fraudulent scheme, they will not grant you relief by separation of liability. Second, if the IRS proves 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, you will not be granted relief by separation of liability, and third, if your spouse or former spouse transferred property to you to avoid tax or the payment of tax, you will not be granted relief.
The IRS also allows a third type of relief from tax liability for spouses who do not qualify for either innocent spouse relief or relief by separation of liability. Equitable relief may be available if you meet all of the following conditions:
- You are not eligible for innocent spouse relief or relief by separation of liability;
- You and your spouse did not transfer assets to one another as part of a fraudulent scheme;
- Your spouse did not transfer assets to you for the main purpose of avoiding tax liability;
- You did not file your return with the intent to commit fraud;
- You did not pay the tax; and
- 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 divorced from your spouse, the IRS will consider it as a positive factor in favor of you obtaining equitable relief.
For more information regarding innocent spouse relief, relief by separation of liability, or equitable relief see IRS Publication 971 entitled “Innocent Spouse Relief.” www.irs.gov