When spouses file a tax return together, they are held jointly and severally liable for the tax debt. Each spouse is legally responsible for paying the entire liability, including tax, additions to tax, penalties, and interest. Realizing that this may not be appropriate in all cases, the Internal Revenue Service offers “innocent spouse relief” to help spouses in a variety of situations. There are three different types of relief that fall under the umbrella of “innocent spouse relief”:
1) Innocent Spouse Relief - you may obtain this type of relief if you filed a joint tax return and the return understated tax that is attributable solely to your spouse’s erroneous item. These items could be income received by your spouse, but not reported on the return or, the items could be incorrectly reported deductions, credits, or property bases attributed to your spouse. The effect of these items, the understatement of tax, would not appear on the return when you signed it. In other words, there was no tax due, or if there was tax due, the item left out and its effect was not shown on the face of the return. You must prove that at the time you signed the return, you did not know, and had no reason to know, that the tax was understated. Finally, when looking at the situation, you must prove it would be unfair to hold you liable for the understatement of tax.
2) The next type of relief is known as “separation of liability” relief. Under this type, the understatement of tax, interest, and penalties is allocated between you and your spouse. In order to qualify for this type of relief you must no longer be married to, or are legally separated from, the spouse with whom you filed a joint return. You qualify under this provision if you are widowed. You must additionally not be a member of the same household as the spouse with whom you filed the joint return during the twelve (12) month period prior to filing your application for relief under this provision.
3) It is very common for one spouse to seek relief from liability from a tax obligation clearly stated on the face of the return at the time of filing. If the liability is reflected on the face of the return, and not an understatement, then the only way to qualify for relief is through the third type of relief - “Equitable Relief.”
In order to qualify for this type of relief, you must establish that taking into account all facts and circumstances, it would be unfair to hold you liable.
There are many factors relevant to relief under this provision. The IRS will consider if you would suffer economic hardship if relief is not granted. The IRS does factor in who is held liable for the taxes under a divorce decree or other agreement to pay the tax - even though the IRS is not bound by these agreements. The IRS will also look at whether or not you received significant benefit from the underpaid or understated tax and whether you knew or had reason to know about the item causing the understated tax or that the tax due would not be paid.
The IRS explicitly takes domestic violence and abuse into account when evaluating claims for innocent spouse relief, especially under the equitable relief provisions. In her most recent report to Congress, the National Taxpayer Advocate explained that “domestic violence and abuse, including economic abuse, have real consequences for tax administration.” See Annual Report to Congress by National Taxpayer Advocate, Most Serious Problems for more details about this issue. The Taxpayer Advocate indicates that about 16% of applicants for innocent spouse relief report that they are victims of domestic violence and abuse. To its credit, the IRS has revised all of its rules regarding review of innocent spouse applications and has expanded the effect abuse will have in determining if relief will be granted to the requesting spouse. The important fact is that domestic violence and abuse is a factor that is being reviewed in more detail than ever by the IRS in the analysis of a request for innocent spouse relief.
By regulation, the Department of Treasury and the IRS established a two year deadline to request Equitable Relief to encourage prompt resolution of liability determinations. Basically, applications for relief under this provision were denied if active collections had been ongoing for more than two years.
On August 8, 2011, the IRS issued Notice 2011-70. The IRS removed the two year rule pending formal alteration of Treasury Regulations. This action was the result of several court rulings that questioned the validity of the provision.
This action by the IRS is important because a somewhat arbitrary rule has now been disposed of and relief can now be granted to otherwise qualified individuals.
It is particularly interesting to note that the IRS included in Notice 2011-70 that those individuals who were previously denied relief under equitable relief provisions solely because of the two year rule, may re-apply for relief.
If you believe that you should be relieved of joint liability with your spouse or former spouse, on a tax return, please contact us. The likelihood for relief is at its highest point given current IRS rules and regulations on this topic.