Innocent Spouse Relief: Exploring Tax Relief Options for Joint Returns
Innocent Spouse Relief: Exploring Tax Relief Options for Joint Returns
Innocent spouse relief refers to a relief type available to married couples who choose to file joint tax returns. Spouses have an option to file separately or jointly on their federal income tax returns. Yet, the IRS encourages married couples to file their tax returns jointly for benefits such as tax breaks. So, what is innocent spouse relief, and how do you request this relief?
Innocent Spouse Relief Explained
The IRS innocent spouse relief abates any tax, interest, or penalties that arise from the joint return of a married couple. By requesting this relief, a spouse can have the responsibility to pay penalties, tax, or interest alleviated if the other spouse omitted or improperly reported items on their tax return.
Filing taxes under the married filing jointly status means that a married couple records their respective income, credits, exemptions, and deductions on the same tax return. Further, such spouses who file income taxes under this status are jointly and severally liable for the penalties, interest, or additions to tax arising from the joint return.
Both taxpayers are held responsible for all the tax due even if one spouse claimed improper deductions or credit or earned all the income. Through the innocent spouse relief, the IRS can relieve a spouse of penalties if they can prove that they were not aware of the tax understatement and they didn’t benefit from it.
Qualifying for Innocent Spouse Relief
Innocent spouse relief is only applicable to self-employment tax or individual income tax. Other types such as Individual Shared Responsibility payments, business taxes, and Household Employment taxes do not qualify for this relief.
Below are the various innocent spouse relief requirements you should meet to be eligible for this relief:
- You and your spouse filed a joint return containing erroneous items wholly attributable to your spouse or ex-spouse.
- You prove that you were unaware, and didn’t have a reason to know about a tax understatement at the time of signing the joint return (Rule of Actual Knowledge or reason to know).
- It would be unjust to deem you liable for the tax understatement considering all circumstances and facts.
- There was no property transfer from you to your spouse (or ex-spouse) or vice versa as part of a scheme to defraud the IRS or another third party.
Requesting for Innocent Spouse Relief
Spouses who believe that only the other spouse should be held liable for the tax understatement can request tax liability relief by filing Form 8857. In the innocent spouse relief form, the filing spouse provides personal information about themselves and their spouse (or ex-spouse).
The filing spouse is also required to provide information about their involvement with finances and preparation of tax returns for the years they want relief.
Innocent Spouse Relief Statute of Limitations
The statute of limitations on the innocent spouse relief is two years from the date of the first IRS attempt to make the tax collection from you. Filing Form 8857 after this time could disqualify you from getting relief.
The IRS requires that you file Form 8857 as soon as you are aware of a tax liability that was solely a result of your spouse’s or ex-spouse’s tax understatement. You may learn of such liability if the IRS examines your tax return and proposes to increase your tax liability, or if you receive a notice from them.
Erroneous Items in Joint Tax Returns
The IRS considers unreported income and false deductions, credit, or property basis as erroneous items. Unreported income refers to any gross income a spouse receives but fails to report. Any improper credit, deduction, or property basis that a spouse claims (or ex-spouse) is also considered an erroneous item.
A deduction for an expense that was never incurred or paid is considered an erroneous item. An example is where a spouse deducts $5,000 for marketing expenses on your joint return but never pays for any marketing.
Another instance is when a spouse deducts an expense that isn’t considered a deductible expense. An example is where a spouse claims a deduction for fees of $5,000 that went into paying court fines. Generally, fines do not qualify as deductible expenses.
A case of an erroneous item could also arise if there lacks a factual argument to justify the deductibility of an expense. An example is when a spouse claims $10,000 for upgrade costs associated with their local store but were actually costs for lawn maintenance and improvement.
Below are innocent spouse relief rules that come into play in determining relief eligibility.
Actual Knowledge or Reason to Know
The IRS establishes that a spouse had knowledge or reason to know about a tax understatement if:
- They indeed knew of the tax understatement.
- A reasonable individual in a similar situation would have been aware of the tax understatement.
Actual Knowledge
A spouse who had knowledge about an error in the entry of an item attributable to their spouse or ex-spouse is not eligible for innocent spouse relief. Both spouses remain jointly liable for that particular tax understatement.
Reason to Know
A spouse who had reason to be aware of an erroneous item in the joint return belonging to their spouse or ex-spouse may not qualify for relief. The IRS puts the following facts and circumstances into consideration to establish whether a spouse had reason to know of the erroneous item:
- The nature and amount of the erroneous item compared to other items.
- Both spouses’ financial situation.
- The academic background and business know-how of the requesting spouse.
- The part played by the spouse in the lead-up to the erroneous entry.
- Whether the spouse failed to question, before or at the time of signing the tax return, the items omitted from or included in the tax return as any reasonable person would.
- Whether the error was a deviation from the pattern reflected in the previous years’ returns.
Alternatives to Innocent Spouse Relief
Spouses who don’t qualify for the innocent spouse relief can explore the following relief types:
Separation of Liability Relief
You can get a separate allocation of additional tax and penalties resulting from an erroneous item in a joint return if you are divorced, legally separated, or widowed. If you get this relief, you become responsible for only the tax amount allocated to you.
Equitable Relief
If you are not eligible for the other relief types following an erroneous item attributable to your spouse (or ex-spouse), you may be eligible for equitable relief.
This relief type may also be available if you reported the correct tax amount in the joint return, but failed to pay tax for that return. Most importantly, you need to show that it would be unjust to be deemed liable for the tax understatement or underpayment under the relevant facts and circumstances.
Bottom Line
While joint returns present some benefits to spouses, they could also result in joint liability of tax and penalties due to erroneous items on the joint return. Innocent spouse relief can alleviate the tax burden if a spouse believes that an error in the joint return is solely attributable to the other spouse. However, they must meet the requirements stipulated by the IRS to qualify for this relief type.