A Quick Discussion on the 3 IRS Innocent Spouse Relief Programs
In this post, we will describe each type of relief to available to a married taxpayer who filed a joint tax return with their spouse, all commonly referred to as IRS Innocent Spouse. Both taxpayers are jointly and severally liable for the tax and any interests and penalties due on that tax when they file jointly even if they get divorced later. But what if your spouse didn’t report income or claimed improper deductions or credits, but you filed in good faith? There is help.
The three types of relief available to married people who filed joint returns are
- Innocent spouse relief
- Separation of liability
- Equitable relief
Married persons who did not file joint returns, but who live in community property states, may also qualify for relief but we will not get into that in detail here since Michigan is not a community property state.
File Form 8857 to Apply for Innocent Spouse Relief
To apply for any form of the types of relief named above, you must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you. For this reason, do not delay filing because you do not have all the documentation. If you missed the two-year deadline, you may still qualify for an exception to this rule, so contact your tax attorney even if the time has already passed. If you are requesting relief for more than six tax years, you must file an additional Form 8857.
The IRS will review your Form 8857 and let you know if you qualify. Needless to say, you need to dot every i and cross every t to have any hope of the IRS accepting your application.
Situations in which You Are Not Entitled to Innocent Spouse Relief
You are not entitled to innocent spouse relief for any tax year to which the following situations apply:
- A court considered whether to grant you relief from joint liability and against you in a final decision
- In a final decision, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief
- You entered into an offer in compromise with the IRS
- You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief
Once again, there are some exceptions to the above, and you should consult a good tax attorney to find out if you fall under one of them.
Your Spouse or Former Spouse Will Be Notified When You File for Tax Relief under Form 8857
By law, the IRS must contact your spouse or former spouse when you file Form 8857. There are no exceptions, even for domestic violence victims. Your spouse or former spouse will be allowed to participate in the process as the outcome affects them.
To protect your privacy, the IRS will not disclose your contact and employment information, income or assets. Any other information you provide to the IRS could be disclosed to your spouse or former spouse. Your attorney can advise you when you can redact personal information in the materials you submit to the IRS in order to afford you some measure of privacy protection.
Tax Court Review of Request
The United States Tax Court is an independent judicial body and is not part of the IRS. Therefore, there are some advantages in petitioning them to review your request for relief. You can do so after you file Form 8857 with some exceptions if:
- The IRS sends you a final determination letter regarding your request for relief, or
- You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857
You must file the petition no later than the 90th day after the date the IRS mails its final determination letter to you. If you do not file a petition, or if you file it late, the tax court cannot review your request for relief. Be aware that if you petition the tax court your spouse or former spouse may see your personal information, unless you ask the tax court to withhold it.
Types of IRS Innocent Spouse Relief Available
Now let’s get to the three types of relief for innocent spouses, one of which is specifically called Innocent Spouse Relief.
Innocent Spouse Relief
By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest and penalties for those items your spouse (or former spouse) improperly reported or omitted on your tax return. However, you are still jointly and individually responsible for any tax, interest and penalties that do not qualify for relief. That means the IRS can go after you alone, your spouse or both of you to collect for amounts that do not qualify for Innocent Spouse Relief (just like any tax, interest or penalty due on a joint return).
Qualifications for Innocent Spouse Relief
- 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 simply means the tax should be more than what was shown on your return.
- An erroneous item could be unreported income or incorrect deductions, credits or property basis.
- You can show 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.
- You knew or had reason to know of an understated tax if
- You actually knew of the understated tax or
- A reasonable person in similar circumstances would have known of the understated tax.
- Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax.
- Neither you nor your spouse transferred property to one another as part of a fraudulent scheme.
- You knew or had reason to know of an understated tax if
The following are examples of factors the IRS will consider in determining if under all the facts and circumstances, it would be unfair to hold you responsible 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 divorced or separated
- You received a benefit on the return from the understated tax
Separation of Liability Relief
Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). The understated tax allocated to you is generally the amount for which you are responsible.
To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857.
- You are no longer married to your spouse or you are legally separated
- You were not a member of the same household as the spouse at any time during the 12-month period ending on the date you file Form 8857. You and your spouse are considered members of the same household if any of the following conditions are met.
- You and your spouse reside in the same dwelling.
- You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other’s household Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service or education.
You must be able to 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 tax.
If you do not qualify for innocent spouse relief or separation of liability relief, you may still be relieved of responsibility for tax, interest and penalties through equitable relief.
Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax or an unpaid tax. An unpaid tax is an amount of tax you properly reported on your return but you have not paid.
Conditions for Getting Equitable Relief
In order to be considered for equitable relief from joint and several liability, you must meet all of the following conditions. In order to be considered for equitable relief from liability for tax attributable to an item of community income, you must meet all of the following threshold conditions except for the first two.
- You are not eligible for innocent spouse relief or separation of liability relief
- You filed a joint return for the tax year(s) at issue
- You timely filed your claim for relief
- You and your spouse or former spouse did not transfer assets to one another as a part of a fraudulent scheme or to avoid payment of tax
- You did not knowingly participate in the filing of a fraudulent joint return
- The income tax liability from which you seek relief is attributable (either in full or in part) to an item of your spouse or former spouse or an unpaid tax resulting from your spouse’s income. If the liability is partially attributable to you, then relief can only be considered for the part of the liability attributable to your spouse. The IRS will consider granting relief regardless of whether the understated tax, deficiency, or unpaid tax is attributable in full or in part to you if any of the following exceptions apply.
- 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.
- You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the unpaid tax 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.
- You establish that you were the victim of spousal abuse or domestic violence before the return was filed, and, as a result, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation.
- The item giving rise to the understated tax or deficiency is attributable to you, but you establish that your spouse’s fraud is the reason for the erroneous item.
If you meet all the threshold conditions, the IRS will grant equitable relief if you establish that it would be unfair to hold you liable for the understated or unpaid tax.