Innocent spouse relief and IRS collections
In these four situations, taxpayers facing IRS collection activity can claim innocent spouse relief.
Sometimes, married taxpayers file a joint tax return only to find out later that one spouse improperly included or omitted items on their return. Common scenarios involve taxpayers not reporting income, claiming deductions they don’t qualify to claim, and overstating basis. Some spouses who find themselves in these situations could qualify for innocent spouse relief.
Because married taxpayers who file a joint tax return are jointly and severally liable for taxes on the joint return, the IRS can collect from either spouse. In some situations, the spouse who is not responsible for the improperly included or omitted items can be excused of responsibility for tax, interest, and penalties arising from the other spouse’s mistakes.
Note: The IRS uses the term “innocent spouse” when talking about a taxpayer who believes only the spouse or former spouse should be held responsible for the tax liability. Innocent spouse claims are sometimes confused with “injured spouse” claims. The IRS uses the term “injured spouse” to mean a person whose share of a joint tax refund was applied to the past-due debt of the other spouse.
Four main types of relief for spouses in this situation are:
- Innocent spouse relief: potentially applies to all joint filers
- Separation of tax liability: could apply to joint filers who are divorced, widowed, legally separated, or have not lived together at any time during the 12-month period ending on the date the request was filed
- Equitable relief: can apply to joint filers who do not qualify for innocent spouse relief or separation of tax liability relief
- Relief from tax attributable to an item of community income under community property laws: can apply to spouses who have community income
Request innocent spouse relief on IRS Form 8857
The flowcharts in Pub. 971, Innocent Spouse Relief, can help identify if the taxpayer qualifies for one of the first three types of relief.
Taxpayers file Form 8857, Request for Innocent Spouse Relief, to request all four kinds of spousal relief. The IRS considers whether the taxpayer qualifies for relief based on the information provided on the form. This request should be made as soon as possible after the taxpayer discovers the issue or becomes aware of a problem. Common scenarios involve one spouse finding out about a problem during an audit or examination or when the IRS sends a notice.
The IRS recognizes that some questions on Form 8857 are sensitive. The questions cover household finances, assets, abuse, and other sensitive facts. The IRS must contact the spouse or former spouse when Form 8857 is filed; however, the IRS will not disclose information including:
- Current name,
- Phone number,
- Employment information,
- Income information, or
- Asset information.
Any other information could potentially be provided to the spouse or former spouse.
If innocent spouse relief is granted, one spouse is relieved of their obligation to be jointly liable for taxes, interest, and penalties due based on items incorrectly reported, or not reported on a joint return filed with their spouse.
What happens after requesting innocent spouse relief
After filing Form 8857, the IRS will stop collection action while it processes the innocent spouse request. The IRS will contact the spouse or former spouse if a joint return was filed for the year that the relief is requested. The IRS will issue a preliminary determination later after reviewing all of the information; this may take up to six months. The taxpayer or spouse can appeal the determination.
The basic rules for requesting innocent spouse relief
Innocent spouse relief can relieve the innocent spouse from responsibility for paying tax, interest, and penalties if they meet the requirements. To qualify for IRS innocent spouse relief, taxpayers must show:
- They filed a joint tax return with their current or former spouse;
- The tax calculation on the original return was too low, and it was too low because of improperly included or omitted items attributed to the taxpayer’s spouse or former spouse;
- When they signed the joint return, the taxpayer did not know, and had no reason to know, that the tax calculation on the return was too low, or the taxpayer did not know the full extent of the understatement;
- Taking into account all of the facts and circumstances, it would be unfair to collect the tax liability from the taxpayer.
The taxpayer has reason to know of the problem if the taxpayer actually knew the tax was too low, or a reasonable person in similar circumstances would have known the tax was too low. But even if the taxpayer had actual knowledge, the taxpayer may still qualify for relief if they can show they were a victim of spousal abuse or domestic violence before signing the return, and because of that abuse, they did not challenge the treatment of any items on the return because they were afraid of retaliation.
Here are examples of improperly included or omitted items:
- Example 1: Improperly included items. The taxpayer’s spouse is self-employed. The spouse deducts $15,000 in advertising expenses and $5,000 in contract labor expenses on their joint return. However, the spouse never actually paid those expenses. The taxpayer does not have visibility to the spouse’s self-employment books, records, or income.
- Example 2: Omitted items. The taxpayer’s spouse gambles. The taxpayer knows the spouse won $1,000 that was not reported on their joint return but is unaware that the spouse also won additional amounts over the year totaling over $20,000 that were not reported on the joint return. In this example, the taxpayer may be eligible for partial relief based on the $20,000 income the taxpayer did not know about.
In general, the taxpayer only has two years from the date the IRS first attempts to collect tax to file Form 8857 to request innocent spouse relief.
Rules for claiming separation of tax liability
This type of relief allocates the understated tax to the spouse who is responsible for the understatement. This relief is only available for unpaid liabilities resulting from the understated tax. Refunds are not issued based on a claim of separation of liability.
The taxpayer must meet these conditions to qualify for separation of liability relief:
- The taxpayer is now divorced, legal separated, or lived apart at all times during the 12-month period prior to the date the taxpayer requested relief on Form 8857, and
- When the return was signed, the taxpayer did not know about the improperly included or omitted item.
Example 3: The taxpayer and their spouse filed a joint return showing the taxpayer’s wages of $60,000 and their spouse’s self-employment income of $15,000. The IRS audited the couple’s return and found that the spouse failed to report $20,000 in additional self-employment income—resulting in $7,000 in unpaid tax, penalties, and interest. The taxpayer filed for legal separation from the spouse and filed Form 8857 to request relief by separation of liability. If the IRS can’t prove that the taxpayer knew of the spouse’s additional income when they signed the return, they will qualify for separation of liability because they didn’t actually know if the spouse received additional self-employment income. If the IRS proves the taxpayer did know of the income, then the taxpayer won’t qualify for separation of tax liability and, instead, might instead qualify for equitable relief.
In general, the taxpayer only has two years from the date the IRS first attempts to collect tax to file Form 8857 to request separation of tax liability.
Equitable relief is available only if the taxpayer doesn’t qualify for innocent spouse or separation of liability relief
Spouses can be relieved of responsibility for tax, interest, and penalties through equitable relief. Unlike innocent spouse or separation of liability, equitable relief is available for underpaid or understated tax. Unpaid tax is tax that is properly shown on the joint tax return but was not paid.
The taxpayer must meet these conditions to qualify for equitable relief:
- The taxpayer has understated tax or unpaid tax, and
- Taking into account all of the facts and circumstances, the IRS determines it would be unfair to hold the taxpayer liable for the understated or unpaid tax.
Factors the IRS will consider include:
- Marital status,
- Economic hardship,
- Knowledge or reason to know of the problem,
- Abuse by the spouse or former spouse,
- Other legal obligations to pay (such as a divorce decree),
- Whether the taxpayer benefitted from the understatement,
- Compliance with income tax laws after the year relief is requested, and
- The mental and physical health of the taxpayer.
Example 4: The taxpayer and former spouse filed a joint return that properly reported income and deductions. The joint return showed an unpaid balance of $10,000. The taxpayer gives the former spouse $5,000 and they promised to pay the full balance due of $10,000. However, they paid nothing to the IRS. There is still an unpaid tax of $10,000.
Generally, the taxpayer can request equitable relief on a balance due anytime within the 10 years the IRS has to collect tax. However, if the taxpayer is trying to request a refund, the taxpayer must generally file the request within three years from the date the original return was filed or within two years after the tax was paid, whichever is later.
Relief from tax attributable to an item of community income
Residents in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) can request innocent spouse relief even if they did not file a joint tax return if they believe they should not have to pay tax on community income.
Taxpayers are not responsible for an item of community income if all of the following conditions exist:
- The taxpayer did not file a joint return for the tax year.
- The taxpayer did not include the item in gross income on the separate tax return.
- The item was income that belonged to the spouse or former spouse under community property laws.
- The taxpayer did not know of, and had no reason to know, of the item.
- Under all facts and circumstances, it would not be fair to include the item in the taxpayer’s gross income.
In general, the taxpayer must file Form 8857 no later than six months before the statute of limitations on assessment against the spouse or former spouse expires.
We can help
When married taxpayers discover issues with their tax returns based on their spouse’s improper actions, the result can be devastating. However, taxpayers in this situation can find relief through the innocent spouse procedures. Check the flowcharts in Pub. 971 and make an appointment with one of our experts today.