Relief is available for those who are the victim of a spouse’s error on their tax return, those who have since divorced their spouse but divorced after the taxes were filed, or those who filed a joint return with their spouse that resulted in an understatement of tax. Generally, married taxpayers who file jointly are both liable for the full amount of tax due.
However, you can show that when you signed the return that you didn’t know, or had no reason to know, of the understatement, or that there were certain erroneous items on the return, that could grant you relief from paying the tax.
Innocent spouse relief Requirements –
Like any other tax debt relief program, there are certain qualifications you must meet in order to receive Innocent Spouse Relief. As per IRS, you may not be responsible for your spouse’s or former spouse’s taxes if all of the following are true:
You must have filed a joint return that has an understatement of tax.
The joint tax return contained an “understatement of tax” due to incorrect information provided by their spouse. This may be either a partial omission of their spouse’s income or a claim of incorrect deductions, credits, or property basis.
The person was unaware of the incorrect information upon signing the tax return.
Taking all facts and circumstances into account, it would be unfair to hold you responsible for the tax debt
You must request relief within two years after the date on which the IRS first began collecting activity against you.
You must also provide the IRS with adequate information to prove your case before it will grant relief. It is important not to falsify any information on your application, as this could result in penalties.
Procedure to Claim Innocent Spouse Relief –
File Form 8857
Form 8857 is the form you will fill out to report the taxes you believe you should not have to pay. This form should be submitted as soon as you receive notice of the taxes you are being held liable for. For example, if the IRS sends you a notice proposing to collect additional taxes based on income you are unaware of, you should begin filing the form immediately. The form must be filed within 2 years of the first attempt to collect the money from you. The IRS will review this form and send it back to you with a judgment on your liability. To prove you should not be held liable, you must provide information supporting the fact you did not know about the obligation to pay.
Form 8857 – https://www.irs.gov/pub/irs-pdf/f8857.pdf
Establish “Reason to Know”
The IRS will establish the likelihood of your knowledge of the tax liability based on a condition called “reason to know.” If you prove you had no reason to know about the money, it is more likely you will not have to pay. The main factors considered are, Nature of the error and the amount of the error relative to other items on your return.
Prove Unfairness
The IRS will also question whether or not it is fair to hold you liable. Just because you did not know about the tax does not mean it is not fair to charge you. If you benefit from the error, you may be on the hook for the money. Provide evidence showing the following considerations:
You did not receive any direct or indirect benefit from the income that was understated
Your spouse deserted you (if applicable)
You and your spouse are separated or divorced (if applicable)
You received no benefit from the lesser tax obligation
In order for these circumstances to apply, your spouse must have made the money independently of you, spent the money independently of you and took advantage of the tax benefits independently of you.
Divorce Decrees Do Not Count
In addition, courts have also held that the IRS is not bound by divorce decrees and other otherwise legally binding agreements reached by the spouses. The rationale behind this is that it would be unfair to limit the collection rights of the IRS by virtue of an agreement that it was not a party to. However, the Internal Revenue Code recognizes that it is not fair to hold innocent spouses responsible for liabilities in all circumstances.
Refunds –
The IRS will only refund payments you made with your own money. However, you must provide proof that you made the payments with your own money.
If you are granted relief, refunds are:
Permitted under innocent spouse relief and equitable relief, as explained under Limit on Amount of Refund; and
Not permitted under separation of liability relief.
Limit on Amount of Refund –
Victim Spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. But you may be entitled to a refund of your portion of a joint overpayment from another year that was applied to the joint tax for a different year. You will need to show your portion of the joint overpayment.
