Innocent Spouse Relief And What Constitutes Actual Knowledge

Innocent Spouse Relief

When an individual becomes aware that they have been unjustly the victim of tax fraud by their spouse, or former spouse, they may be able to obtain relief from the IRS. In order to get innocent spouse relief, the applicant must provide proof that they had no “actual knowledge” or reason to know of any understatement on their joint tax return.  But what is innocent spouse relief? And what, exactly, constitutes “actual knowledge?”

Conditions for Innocent Spouse Relief

To qualify for innocent spouse relief, the applicant must meet all of the following requirements:

  • They must have filed a joint tax return which has an understatement of the tax that is solely attributable to their spouse’s erroneous item. In this instance, erroneous items include any income received by the spouse, but omitted from the joint tax return, as well as any inappropriately reported credits, deductions or property.
  • They establish that at the time the joint tax return was signed, they had no knowledge – or reason to know – that there was an understatement of tax, and
  • Taking into account any and all other factors, it would be unfair to hold them liable for the understatement of tax.

Actual Knowledge

With regards to actual knowledge, the IRS will consider all relevant facts and circumstances to determine if the individual had reason to know of any understatement of tax due to an erroneous item. These circumstances can include:

  • The nature of the erroneous item and the amount of the erroneous item relative to other items.
  • The financial situation of you and your spouse (or former spouse).
  • Your educational background and business experience.
  • The extent of your participation in the activity that resulted in the erroneous item.
  • Whether you failed to ask, at or before the time the return was signed, about items on the tax return or omitted from the return that a reasonable person would question.
  • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (for example, omitted income from an investment regularly reported on prior years’ returns).

The IRS will also consider, as detailed in Publication 971 the nature and amount of the item of community income, relative to other income items, your financial situation, and your educational background and business experience.

How to File for Innocent Spouse Relief

If an individual feels that their case satisfies the conditions for innocent spouse relief as listed above, they should file for relief from the IRS as soon as they become aware of their tax liability which they believe their spouse, or former spouse, should be liable for.

To file for innocent spouse relief, the individual seeking relief needs to file Form 8857 “Request for Innocent Spouse Relief” no later than two years after one of the first attempts by the IRS to collect the tax from you.

Partial Relief

If an individual qualifies for and is granted, relief as an innocent spouse, they are relieved of any liability for tax, interest, and penalties relating to the understatement on the relevant tax return.

In the instance of partial knowledge of an understatement, the IRS may award partial relief when a portion of an erroneous item is unknown. The IRS provides an example of an individual knowing their spouse failed to report $5,000 in gambling winnings on their tax return. However, when the IRS investigates the claim, they discover $25,000 in gambling winnings are understated. In this example, the individual obtains partial relief for the $20,000 they did not know about, but would still be liable for the $5,000 they knew their spouse had failed to report.

Contact an Experienced Tax Lawyer Today

If you are facing unjust liabilities or penalties from the IRS, you need a tax law firm who is willing to fight for you. At Ayar Law, we represent people and business with state and federal tax problems that require creative solutions. We focus entirely on tax problem resolutions and giving our clients a fresh start. We strive to get you the best solution for your individual situation. So, if you’re having tax troubles call Ayar Law today at (248) 262-3400 for a free, no-obligation consultation.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.