Innocent Spouse Relief

Happy New Year 2015, this is always a time for a new start. No matter what problems you are going through you can make them better by obtaining good information – e.g. the information provided on this blog site – and implementing plans to deal with the problems.

One of my early blog posts, way back on August 5, 2014, dealt with the topic of escaping the requirement to report a share of community property income if you and your spouse file separate income tax returns (see Other Relief From Community Property Rules). Very closely related to that topic is the topic of obtaining relief from a tax deficiency assessed when a married couple files a joint tax return. Both spouses are generally jointly and severally liable for all taxes related to joint tax returns. The process of obtaining relief from such tax is called “Innocent Spouse Relief” and may possibly be obtained by filing an Internal Revenue Service Form 8857 Request for Innocent Spouse Relief. The following is a brief summary of the process and when it may apply.

When spouses file joint income tax returns, they generally make a provision to pay the income taxes shown on the return (however, see equitable relief below for an exception). The need for relief generally comes into play if the couple is later audited and the IRS determines that additional taxes are owed. One of the spouses may apply for relief from being held liable for the assessment by filing the Form 8857 within two years after commencement of collection efforts by the IRS. There are four specific options for relief as follows:

Traditional Relief under IRC § 6015(b) may be available if

a) The taxpayer establishes that she/he “did not know or have reason to know” of the understatement of tax on the joint return, and
b) The taxpayer can offer reasons why it would be inequitable to hold her or him liable for the deficiency (e.g. they did not benefit financially from the understatement)
c) Partial relief can be granted based on the extent of knowledge

Separate liability election under IRC § 6015(c) may be available if

a) The taxpayer is currently divorced, separated or has not have lived with their spouse for the last twelve months
b) This provision shifts the burden of proof to the IRS to demonstrate that the taxpayer had “actual knowledge” of the understatement (this may be easier to establish than demonstrating that they did not have reason to know)
c) If the taxpayer qualifies, the deficiency will be allocated between the spouses based on whose return it would have appeared on had they filed separate returns
d) Both spouses can claim the separate liability election

Equitable relief under IRC § 6015(f) may be available if

a) The requesting spouse did not benefit from the understatement (i.e. they did not utilize the tax funds not paid) and relief is not available under the other provisions above, and
b) A variety of factors may warrant relief under this provision including: economic hardship, abuse, no knowledge of understatement, or the divorce agreement allocates liability for deficiency
c) Equitable relief can be sought for any unpaid tax liability, not just a tax deficiency (this can help when the tax on the return as filed was not paid)
d) The time for filing for this relief is generally within the statute of limitations period for collection of tax (usually ten years) or within the statute of limitations for any credit or refund of tax.

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