When you file a joint tax return, the IRS views you and your spouse as a single legal unit. So if your spouse commits any tax errors or fraud, you could be in hot water.
That is because the concept of “joint and several liability” means the IRS can legally collect the entire tax debt from you, even if your spouse earned all the taxable income or committed all the fraud or errors.
However, the tax law provides an “escape hatch” known as innocent spouse relief. It’s applicable in instances where the IRS determines it would be unfair to hold one spouse jointly liable for a tax debt.
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If you are facing a massive tax bill due to your partner’s misdeeds, here’s how to determine if you qualify for tax relief and what steps to take to proceed.
Who qualifies for IRS innocent spouse relief?
“Innocent spouse” relief is exactly what it sounds like: the spouse claiming relief didn’t know about the tax return’s irregularities.
If you think you qualify for this type of relief, you must show that:
- You filed a joint return with a tax understatement, i.e., the tax liability reported on the return is lower than the true tax liability.
- The understatement was the result of your spouse not reporting income or taking improper tax deductions.
- You didn’t know, and had no reason to know, about the understatement when you signed the return.
What does “reason to know” mean? This IRS standard asks whether a reasonable person in the requesting spouse’s shoes should have known about the understatement. Factors the IRS will take into account include:
- Education and experience: The requesting spouse’s level of education and financial expertise.
- Financial involvement: The requesting spouse’s involvement in the household’s finances.
- Lavish spending: Whether there were lavish or unusual expenditures compared to the normal standard of living, which should have alerted the requesting spouse that more money was coming in than was being reported.
- Deceit or evasiveness: Whether the non-requesting spouse was secretive about the mail, bank accounts, or tax records.
The IRS will consider all the facts and circumstances of the request and determine whether it would be unfair to hold the requesting spouse responsible for the tax understatement.
Should the IRS deny relief, the requesting spouse can appeal the denial to the U. S. Tax Court, which will review the request anew (without reference to the IRS’s findings).
Spousal abuse and control are a special consideration. The IRS and the Tax Court take spousal abuse and domestic violence seriously, giving both significant weight in their findings.
For example, the knowledge factor, i.e., whether the requesting spouse knew or had reason to know about the error or fraud, can be mitigated if the spouse was abused or under financial control (where their access to money or information was limited).
If the requesting spouse signed the tax return under duress, the IRS may treat the “reason to know” factor as favoring them, even if they were aware of the errors or the fraud.
Innocent spouse relief: IRS Form 8857
For innocent spouse relief, the requesting spouse must file Form 8857 within two years after the IRS begins collection activity for the tax year in question. The following are considered “collection activities”:
Tip: Don’t wait to file Form 8857 to request relief because you don’t have all the documentation you need, like your ex-spouse’s records. You can always provide the missing documents while the case is ongoing. Be aware that in filing Form 8857, the IRS will contact your ex-spouse.
When “I do” becomes “I don’t”
If you find yourself saddled with the tax misdeeds of your spouse about which you knew nothing, file a Form 8857 with the IRS asking for innocent spouse relief. As mentioned, you shouldn’t delay; you must do this within two years after the IRS begins its collection activity.
Be prepared, however, for the tax agency to look not just into your financial life but also into various aspects of your relationship with your spouse.
That process might feel uncomfortable, but if it means shedding a life-altering tax debt you didn’t create, it might be a necessary trade-off. Consult a trusted tax professional to see whether innocent spouse relief is right for you.