Innocent Spouse: What to Do When Filing a Joint Tax Return Goes Bad

Adjust text size

Article Tools

print this article

add bookmark

digg this

reddit

save to del.icio.us

What do you do if your spouse wasn't honest when filing a joint tax return? Find out how you can claim innocent spouse to place the debt where it should be and get tax relief when filing jointly.

Filing Jointly: Not Always in Your Best Interest

Filing a joint tax return with your spouse generally saves you money, but can cause problems if your spouse is less than honest at tax time. If your spouse understates income or takes deductions he or she is not entitled to, you could end up on the hook for additional taxes and penalties -- even prosecution if there is fraud involved.

"Innocent Spouse" Can Find Relief

This is particularly frustrating if you are divorced, separated or were deserted by a spouse.

Contrary to popular belief, both spouses are not always responsible for taxes due when filing jointly. Under innocent spouse tax relief, innocent spouses can be relieved of paying tax, interest and penalties caused by a spouse or former spouse who omitted or wrongly reported items on a tax return. If you believe you are qualified, file IRS Form 8857. Most people find themselves filing IRS Form 8857 when items on tax returns go wrongly reported. These items may include underreported income or an incorrect deduction, property basis or credit claimed.

Although being divorced or separated may work in your favor, the IRS may find it fair to hold you responsible if you received a significant benefit from the tax understatement, either directly or indirectly.

You may qualify for relief if you:

• File a joint return with an understatement of tax due because of your spouse.
• Did not know and had no reason to suspect tax was understated when you signed the return.
• Would be treated unfairly by being held liable for the understated tax.
• Are not attempting to transfer property between yourself and your spouse as part of a fraudulent scheme.
• Request innocent spouse relief within two years after the IRS began collection activity against you for the unpaid taxes.

On form 8857 you will be asked about your education, involvement in the tax preparation and household finances, current marital status, mental and physical health when the return was filed, and current financial position. The IRS will also ask if you have a disability and if there was spousal abuse in your marriage. The idea is to determine how involved you were in the finances, how much you knew about the taxes, how capable you were of influencing your spouse, and how much you benefitted from misstatements on the return.

The Not So Innocent Spouse Can Appeal

The IRS will notify the other spouse if one spouse files a claim for innocent spouse relief. If one spouse is granted tax relief, the other spouse may appeal the decision.

Other types of tax relief for spouses include:

• Separation of liability - you must be legally separated from or no longer married to your former spouse. Nor can you have lived with this person during the last 12 months.
• Equitable relief -- you may dodge the joint liability if you can prove that it would be unfair to hold you responsible for it.

In relief by separation of liability, unpaid tax liabilities are allocated between the spouses by the IRS and each is no longer responsible for anything beyond his or her share. Under equitable relief, the injured spouse may be absolved of some or all of the applicable tax liability.

Source:
IRS Pub 971 Innocent Spouse Relief