Innocent Spouse Relief: Exploring Tax Relief Options for Joint Returns
Innocent Spouse Relief Explained
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.
- 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 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
Actual Knowledge or Reason to Know
- 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
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.
