My Spouse Screwed Me Over….Now What?

Making a Case for IRS Innocent Spouse Relief

We have tried to drill it in hard that when you sign a return, you are responsible for everything that is on that return, regardless of who prepared it.  So it should come as no shock that the same applies for a joint return with your spouse.

In joint returns, both signatories are held in “joint and several liability” for the information on the return and can be held liable for the entire tax amount, including penalties and interest if the taxes are underpaid or not paid at all.

In any marriage, however, there are situations where one spouse may deceive the other spouse for any number of reasons, and in any number of ways.  Finances, and more specifically, taxes, are no different.  For instance, what if one spouse underpaid joint taxes without the knowledge of the other spouse? Or what if one spouse neglected to report an item(s), used the wrong tax basis, or committed any other number of possible tax violations that could have caused your joint taxes to go underpaid?

If any of the above situations apply to you, you may be eligible to file for Innocent Spouse Relief.

It is not easy to qualify (the IRS receives over 50,000 requests a year, but grants less than half).  It is determined on a case-by-case basis, and you should consult a tax attorney to advise you in presenting your case to the IRS.

Types of Relief

Innocent Spouse Relief is only one type of relief you are filing for with Form 8857.  There are other types of relief you can qualify for with this form:

• Innocent Spouse Relief
• Separation of Liability
• Equitable Relief

Innocent Spouse Relief

The IRS is extremely disinclined to simply let a taxpayer off the hook because they claim they did not know their spouse (or former spouse) had filed faulty tax returns.  In order to qualify for Innocent Spouse Relief in full, the taxpayer (innocent spouse) must meet a set of criteria first.  If even one criterion is amiss, the innocent spouse will not qualify for full Innocent Spouse Relief, though they may still qualify for Partial Innocent Spouse Relief.

Criteria for Innocent Spouse Relief:

As stated before, the IRS is very unsympathetic to anyone simply claiming ignorance as an excuse for the fraudulent tax returns bearing their signatures and information.  There are a list of ironclad qualifications that must be met in order for the IRS to excuse the taxpayer from any liabilities with the fraudulent returns.  They are as follows:

• You filed a joint return
• There is an understated tax on the return that is due to erroneous items of your spouse (or former spouse)
  • Understated tax means the tax should be more than what was shown on your return.
  • An erroneous item could be any unreported income or incorrect deductions, credits, or property basis.
• You can prove that when you signed the joint return, you did not know, and had no reason to know, that the understated tax existed or how much it was understated
  • On the other hand, you knew or had reason to know of an understated tax if
    • You actually DID know of the understated tax or
    • A reasonable person in similar circumstances would have known of the understated tax.
  • Neither you nor your spouse transferred property to one another as part of a fraudulent scheme.
  • Taking into account all the facts and circumstances (see below), it would be unfair to hold you liable for the understated tax
    • You received a significant benefit either directly or indirectly, from the understated tax.
      • A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances.  Evidence of a direct or indirect benefit may consist of transfers of property or rights to property.
    • Your spouse deserted you
    • You and your spouse are already divorced or separated
    • You received a benefit on the return from the understated tax

The IRS also takes into consideration the following information about you:

• Education
• Work experience
• Relationship status: married, divorced, separated
• Any physical or mental disabilities
• Level of involvement in household finances.

There is no single deciding factor that will determine if you qualify for innocent spouse relief, although being divorced, or in the process of getting divorced, is a positive factor toward qualification.  Furthermore, if you were in an abusive marriage and forced to sign a fraudulent return without question under duress or threat of physical violence, you may qualify for innocent spouse relief.  Simply stating that your spouse lied to you or that you did not know what you were signing is not sufficient for the IRS to grant relief.

Separation of Liability

This is exactly what it sounds like.  It is a method where the understated tax (plus interest and penalties) is separated between two spouses (or former spouses).  Although you are filing the same Form (Form 8857), as with the Innocent Spouse Relief, these are in fact very different and the Separation of Liability Relief has its own set of conditions that must be met.

Criteria for Separation of Liability:

• You and your spouse filed a joint return
• You and your spouse are no longer married or you are legally separated. If you are widowed, that also counts as no longer married in this situation.
• You and your spouse were not members of the same household at any time during the 12-month period ending on the date you filed Form 8857.
  • However, you and your spouse are considered members of the same household, even if technically you do not share a residence, but are still together. In other words: if you are not estranged, but do live in separate dwellings for some reason.

Examples of this may include: imprisonment, employment, illness, vacation, military service, education, etc.

In order to qualify for this type of relief, you must prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid paying taxes.

Equitable Relief

For those who do not meet the criteria for Innocent Spouse Relief or Relief by Separation of Liability, they may still be relieved of responsibility for tax, interest, and penalties through Equitable Relief.

Equitable Relief may be available if there was an underpayment of tax (an amount of tax you properly reported on your return but have not paid) or an understatement of tax (generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.  In other words, Equitable Relief may be available if your returns have unreported income or unpaid liability, neither of which has been paid.  The IRS must also come to the conclusion that, after taking into account all facts and circumstances, it is unfair to hold you liable for the tax understatement or underpayment.  It should be noted that Equitable Relief is the most difficult type of relief to obtain.

Criteria for Equitable Relief:

• You are not eligible for Innocent Spouse Relief or Relief by Separation of Liability.
• You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
• Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax.
• You did not file or fail to file your return with the intent to commit fraud.
• You did not pay the tax.
• You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax.
• The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies:
  • The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of Equitable Relief.
  • If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.
  • You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting Equitable Relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).
  • You establish that you were the victim of abuse before signing the return and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.
  • You establish that your spouse’s (or former spouse’s) fraud is the reason for the erroneous item causing the understatement of tax

The IRS Spousal Relief rules are tough, but if you think you might be eligible, talk with a qualified tax attorney from Ayar Law before trying to go it alone.