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‘Innocent Spouse Relief’ Protects Against Tax Fraud

By Jason Alderman

I’ll wager that when most brides and grooms utter the phrase, “For better or for worse,” the “worse” they’re imagining probably involves situations like getting laid off or a prolonged family illness – not being the victim of tax fraud perpetrated by a current or former spouse.

Married couples typically file joint tax returns because it lets them take advantage of certain tax credits and other benefits not available if they file separately.

However, one potential drawback is that you’re each responsible, jointly and individually, for any taxes, interest and penalties due on returns filed while you’re married, even if you later divorce. Worst case: You could be held responsible for all amounts owed even if your spouse earned the entire income that year.

So what happens if your spouse or ex-spouse – either unintentionally or deliberately – underreported income, overstated deductions, didn’t report taxable IRA distributions or any of a host of other sins in the eyes of the IRS? Well, you could be left holding the bag, even if those things occurred without your knowledge or understanding.

That’s why each year tens of thousands of people file for “Innocent Spouse Relief” with the IRS. Unfortunately, it can be very difficult to prove your case and many are denied. Plus, until recently, the law mandated that in all cases you must have applied for relief within two years of the IRS’ first collection activity or your claim would be disqualified.

But in one respect at least, the IRS has eased the burden of proof: Last year, the agency eliminated the two-year requirement for taxpayers filing for “equitable relief,” a category open to taxpayers who don’t meet the strict requirements of other provisions in the Innocent Spouse law.

The IRS’ change of policy recognized that in some cases, the victimized spouse doesn’t even become aware of the transgression until long after the fact. Often it’s because the offending spouse has concealed the information or hid or did not forward mailed underpayment notifications from the IRS – or, in the case of domestic abuse, the victim was afraid to come forward.

Here’s a brief overview of how Innocent Spouse Tax Relief works. There are three categories of relief you may seek:

Innocent spouse relief, which relieves you of all responsibility for paying tax, interest and penalties if you can prove your spouse made mistakes on your joint return. This is the most difficult to attain because you must prove to the IRS that at the time you did not know – and had no reason to know, that your spouse underpaid taxes.

Separation of liability, where the IRS basically allows you to pay the portion of taxes you are responsible for, then goes after the errant spouse for his or her understated taxes, interest and penalties.

Equitable relief. If you cannot prove eligibility for the first two provisions, you may qualify for this category of spousal relief, where the IRS will give more leeway, such as the dismissal of the two-year filing requirement. For example, say you didn’t know that your spouse had used money intended to pay the tax bill for some other purpose.

To apply for Innocent Spouse Relief, you’ll need to file IRS Form 8857; however, one form will work for multiple years’ filings. Don’t delay filing just because you don’t have all required supporting documentation, since in some cases the two-year filing deadline does still apply.
In making its ruling, the IRS will consider factors such as your educational and business experience, the couple’s financial situation (e.g., economic hardship) and the extent of your participation in the action that resulted in the erroneous item. The IRS will deny a claim if they believe you benefited from the tax avoidance – for example, if your spouse didn’t report lottery winnings and you received a share.

Taxpayers whose past request for equitable relief was denied solely because of the two-year limit may reapply using IRS Form 8857 if the collection statute of limitations for the tax years involved has not expired.

Innocent Spouse Relief is a complex topic, so visit the IRS’s Tax Information for Innocent Spouses website for detailed information on the various types of relief available, eligibility qualifications, statutes of limitations for collecting refunds, rules for people living in “community property” states and much more. 

I hope that your marital “worst case” never goes past a minor spat or two, but it’s good to know there is relief available for such terrible situations.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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