Blog
We keep you up to date on the latest tax changes and news in the industry.
Understanding What Innocent Spouse Relief Is, and Whether You Need It
When you got married, you and your spouse pledged your love for each other and promised to stand together through good times and bad, sickness and health. But what happens if your spouse turns out to be a tax cheat, and you signed a joint tax return without realizing it. Can you be held responsible?
Finding out that your spouse has dragged you into their tax evasion is a twofold problem. There’s the emotional aspect that surrounds your relationship and your marriage, and the more pragmatic issue of whether their actions make you subject to fines or penalties, as well as whether you’ll have to pay for their taxes. Though we have no advice for you on the former, there’s good news on the latter. You’re probably eligible for what is known as Innocent Spouse Relief.
Filing Joint Taxes and Innocent Spouse Relief
Most married couples file their taxes jointly. There are plenty of reasons for doing so, including several important incentives for doing so that the government offers. But when you sign a joint income tax return, it makes both you and your spouse equally responsible for the taxes that are due, as well as any fines, penalties, and interest that may accrue. That responsibility is joint – meaning that you owe it together – but it is also able to be collected severally – which means that each individual may be expected to pay the whole.
Joint tax returns are signed by both spouses, and the signature is a pledge that the taxes are accurate. When the IRS finds that is not the case, it has no interest in or ability to establish which spouse is behind the error, or in deciding who should make up the difference. Both spouses are responsible for paying their tax liability, and it is up legally up to them to make it happen. If the shortfall and any related penalties or fines aren’t paid, then both can be pursued legally and financially, together or separately. In fact, the courts have gone so far in support of the IRS’ pursuit of either spouse that they have determined that the agency is not required to abide by divorce decrees and other legally binding agreements meant to divert the agency away from one or the other spouse.
Still, the agency has acknowledged that their equal opportunity pursuit of both signors of a joint tax return is not necessarily appropriate when one of the partners was unaware of their spouse’s wrongdoing. That’s where Innocent Spouse Relief comes in. It specifically grants liability relief to an innocent spouse for any unpaid taxes, as well as associated interest and penalties, for income or wrongdoing about which they were unaware. If there are portions of the tax return that are correct and legitimate, then the co-signer of the return is still responsible and can be pursued for those related taxes and fees.
If you find that your spouse committed some form of tax evasion on your joint tax return and you want to see whether you qualify for Innocent Spouse Relief, here are the basic criteria:
Having filed a joint tax return with your spouse
The IRS has indicated that the tax liability on your joint tax return is greater than the amount reflected on the form
The shortfall in the amount reflected on your tax return was a direct result of an action by your spouse
You are able to demonstrate a lack of knowledge about the shortfall on the tax return and had no reason to suspect that such a thing had occurred (the IRS refers to this as an absence of either “reason to know” or “actual knowledge”)
The IRS agrees that it would reflect a level of “unfairness” to hold you responsible for the shortfall created by your spouse.
So how does the IRS establish – or how do you disprove — that you had knowledge of your spouse’s tax evasion?
It’s all a matter of timing. If the IRS has reason to believe that you knew about the issue when the return was filed (and when you signed), then you cannot be considered innocent. In fact, you would be deemed an accomplice. Of course, proving what somebody knew or didn’t know is a big challenge, so the government only holds itself to the standard of proving that there was “reason to know.” There are a few considerations that go into that test, including:
What type of tax deficiency is involved and the amount as compared to other list items in the tax return
The couple’s finances
The educational background and business experience of the spouse who is claiming innocence
How much each spouse was actively engaged in the specific issue that the tax deficiency involved
Whether, in a way that is considered reasonable or that would be expected, the spouse claiming innocence questioned the specific items involved in the deficiency on the return when signing it
Whether the deficiency made that year’s return significantly different from previous years’ returns
The basic element that these considerations are proving or disproving is whether the spouse claiming innocence had a reason to know or suspect that there was something amiss on the return at the time that they signed it. And since knowledge is hard to prove, courts limit their decision that knowledge existed to situations where the IRS is able to provide significant evidence that the spouse claiming innocence actually did know about the wrongdoing. Without strong proof, the innocence plea is generally upheld.
How Would You Prove Yourself to Be Deserving of Innocent Spouse Relief?
If you have filed a joint return that has been found to be evasive and you want to prove yourself eligible for innocent spouse relief, you need to meet three specific criteria. They are:
Belief that the discrepancy was a result of a mistake discovered after the tax return was filed
Have evidence that you didn’t know about the discrepancy
Show that you believe that after all the information is presented to the court, it will be evident that you shouldn’t be held responsible
Each of these points goes back to whether you had reason to know about the shortfall on your tax return. In some cases, the understated taxes at issue are a result of incorrect calculations – simple math errors or mistakes made regarding credits or tax basis on an asset. But in other cases, it is a matter of unreported income, either from a side business, from cash transactions, or from investments.
If you want to request innocent spouse relief you need to do so within two years of the time that you become aware that the IRS tries to collect the amount that is owed. That two years can be interpreted in a number of ways, including you having become aware of the mistake on the return and suggesting to your spouse that you owe more money; or by having received notification from the IRS that there is a problem with the joint return. It can also be a lawsuit filed against you by the government indicating that you have joint liability or an intent to levy your property. Either way, the application is submitted using IRS Form 9968, Request for Innocent Spouse Relief. You can also qualify for Innocent Spouse Relief if the IRS files a claim saying as much in court if there is a court proceeding such as a bankruptcy filing that you are involved in.
One thing that is important for anybody filing for innocent spouse relief to be aware of is that you cannot do so without your spouse being notified of your filing. This is even true if you are in the midst of a divorce or have been subjected to domestic violence. There is no way to avoid your spouse being involved in the process.
The idea of your spouse including you in their wrongdoing — and possibly subjecting you to action by the IRS — is enough to put any marriage to a significant test. While you may want to seek marriage counseling, or legal action, with regards to how purposeful tax discrepancies impact your relationship, the question of how it impacts your finances is an entirely different story, and one that requires consulting with a tax expert. For information on your options and how you should proceed, contact our office today to set up a time for a conversation.
Want our best tax and accounting tips and insights delivered to your inbox?
Sign up for our newsletter.