Innocent Spouse IRS Tax Relief - Know Your Rights
Updated: Nov 2, 2019
Married taxpayers typically file a joint federal income tax return to maximize tax benefits and minimize heir tax liabilities. This is generally the best strategy and when tax payments are made on time and all income is reported, times are good. In other cases, one spouse will under report income or over report deductions, leaving the other spouse on the hook for unpaid taxes when the marriage, and tax compliance, goes downhill. Often one spouse will feel blindsided by the other spouse’s behavior. While the IRS may sympathize, it generally will still hold the blindsided spouse liable for the joint tax debt. Where a spouse is innocent of wrongdoing and unaware of the misreporting on the tax return, the innocent spouse may be relieved of paying the tax debt and related penalties and interest.
The starting point is understanding the rules for married taxpayers taxpayers filing jointly. Upon making the joint filing election, married taxpayers will have joint and several liability with respect to the income tax liability. This means that each spouse may be held liable to the IRS for the full amount of any unpaid taxes, penalties and interest. This is true even if the IRS requests payment from the other spouse first Or if one spouse does not earn any of the income reported on the return. The IRS can go after either spouse, meaning generally the spouse who is in a better position to pay in full. The IRS will not settle for half just because taxpayers get divorced after the return is filed.
Next, the IRS holds both spouses responsible for the accuracy and completeness of the return. This means the IRS assumes a taxpayer has reviewed the return prior to filing. Many spouses will not do this but instead just make sure someone filed the return. If the guilty spouse says the CPA filed the returns, the innocent spouse often assumes it is fine. In other cases, a spouse may forge a signature to avoid disclosing unreported income to the other spouse. Often when everything seems fine, the innocent spouse will just assume everything is fine.
Innocent spouses may request relief from the burden of paying the taxes, penalties and interest related to the spouse‘s income or deductions if they meet certain requirements. There are special rules for taxpayers who live in community property states where each spouse is automatically treated as earning half of the family income and liable for half of the tax liability. In community property states, a spouse may be liable under the rules even when separate tax returns are filed.
Can a Taxpayer Just Change Filing Status?
A taxpayer requesting relief may believe that filing an amended return to switch to married filing separate status may solve the problem. Unfortunately, taxpayers have a limited time-frame to change their filing status. Taxpayers must do this before the tax filing deadline, including a filing extension. This means either April 15th or October 15th if an extension is filed. If separate returns are not filed by this deadline, the joint return generally must stand and other methods of relief should be sought out by the innocent spouse.
When Can a Taxpayer File an Innocent Spouse Claim?
There are various circumstances where an innocent spouse can claim relief. These options may be difficult to assert at times and are heavily dependent on evidence to support a claim. Taxpayers should involve a tax attorney with IRS experience to handle this matter to increase the chances of winning the claim and to effectively navigate the appeals process if the first agent declines to provide relief. Often more experienced IRS managers will be able to better assess a claim and review the evidence accordingly. The general options available for relief relate to returns signed or filed under duress, forged signatures, and cases where the innocent spouse was unaware of the other spouse's activities that led to the understatement of tax. Importantly, innocent spouse relief must be requested within two years from the date of the first collection activity. Taxpayers who request innocent spouse relief cannot wait longer than the two years. If they do, they must then seek other tax relief options which may requirement involvement of the other spouse, who is by then most often an uncooperative ex-spouse.
For taxpayers claiming relief from joint filing responsibility because of duress, a successful claim results in the joint return being invalid. Proving duress is a high burden on the taxpayer, requiring the taxpayer to demonstrate that he or she was unable to resist the demands to sign the return and the taxpayer would not have signed the return except for the pressure exerted by the other party. If a taxpayer is able to prove these two factors, the signature is considered invalid and the joint return is therefore invalid and no joint liability results. The IRS will then update the taxpayers to treat the two as filing a separate returns. The taxpayers have an opportunity to file their own returns.
A more common issue for joint return filers is a case of a forged signature. Typically, one spouse will consent to the other spouse preparing and filing the tax return. In such cases of tacit consent, taxpayers will not be relieved of joint and several liability. The IRS will review various factors of tacit consent to determine the proper course of action. In cases, where there is indeed a forgery, the taxpayer will be treated as filing a separate return and will have the opportunity to file a separate return. The IRS will also consider following up with the criminal division for a referral of the spouse who forged the signature.
Another common occurrence is an injured spouse. The injured spouse rule should not be confused with the innocent spouse rule discussed later. In cases where there is a tax overpayment, and resulting tax refund, related to a joint return refund, the IRS will apply the overpayment to various debts that it is aware of prior to issuing a refund to the taxpayer. Various debts that a federal tax overpayment can satisfy include past-due child support, federal agency debt, past-due state income tax debts, and state unemployment compensation debt. The use of the tax refund to pay off these debts is called a "refund offset". An injured spouse can file a claim to recover part of a joint refund that would be used to pay the liabilities listed above of the other taxpayer.
Other benefits a spouse may seek include relief from a fraud tax penalty in cases where the innocent spouse does not commit the fraud. A spouse may also file an offer in compromise claim to avoid a share of the joint return tax debt where payment of the tax would create or further economic hardship of the taxpayer. Importantly, the interplay between the innocent spouse rules and the offer in compromise rules require careful consideration. An offer in compromise that the IRS accepts is considered to conclusively settle the tax debt covered by the offer in compromise. The downside of an offer in compromise, and one of the reasons why the offer in compromise program is considered to be so generous, is that the tax liability is considered accepted by the taxpayer and may not be later contested through another form of relief. In the context of an innocent spouse claim, which is basically a claim to contest the underlying liability of the taxpayer for the tax, if an innocent spouse first seeks out an offer in compromise, and the offer is accepted, the taxpayer cannot later seek innocent spouse relief. For this reason, taxpayers should carefully consider all relief options and consider innocent spouse relief as the primary relief option, especially considering the two year window for filing such a claim. The opposite is true if the non-innocent spouse files for an offer in compromise - the innocent spouse can file for either offer in compromise relief or innocent spouse relief and is not limited by the other spouse's actions.
Another consideration is whether collection activity can continue during the period that an innocent spouse claim is pending. The general rule is the IRS cannot pursue collection activity while an innocent spouse claim is pending. The collection expiration statute is extended, but for taxpayers seeking relief, the fact that no collection activity will occur is important because these cases may take longer to process.
Innocent Spouse Claims Under IRC 6015
This section expands on some of the topics discussed above related to innocent spouse relief. An innocent spouse claim does not require duress or a forged signature. Relief is available for other actions as well to mitigate joint and several liability. Taxpayers must understand procedural issues as well as the requirements for relief to protect their rights. Procedural issues are discussed below.
An innocent spouse claim is started by filing Form 8857 to request relief.
If you need Assistance with an innocent spouse claim, contact tax attorney Andrew Steiger at Steiger Tax Law. Innocent spouse claims can be difficult to win and are fact intensive. Call for a free consultation to discuss the merits of your case.