The purpose of the innocent spouse rule so far as the IRS is concerned is to effectively limit the joint liability which results when a couple files a joint income tax return. Be aware, however, that filing an innocent spouse claim is both difficult and time-consuming particularly in community property states.  There is one form of relief for any person filing jointly and another form those who may be separated or divorced from their spouse or widowed. The IRS may also—if they choose—make the determination to relieve the taxpayer of liability because they find it unfair to do so. The spouse making the innocent spouse claim may be relieved of joint tax liability if they meet certain criteria. First of all, a joint tax return must have been filed, and on that return one spouse must have made an underpayment of the taxes owed or an understatement of income.

Criteria for Innocent Spouse Claim

The spouse claiming innocent spouse exemption must not have known about the tax understatement and must be seeking relief in an IRS-approved manner within two years of collection actions against him or her. Generally speaking it is easier to obtain innocent spouse relief in the event of a separation, divorce or death of a spouse. In these cases the innocent spouse may ask for a separation of liability for the tax deficiency on a proportional basis, acting as though separate tax returns had been filed from the very beginning. Issues which resulted in tax deficiencies will be portioned to the spouse who incurred those deficiencies. Such relief must be requested within two years of collection action against the innocent spouse.

In order to determine whether or not you will qualify for an innocent spouse claim you must be able to prove that the taxes owed definitively belong to your ex-spouse. This could be because you were not working at the time the taxes were incurred or perhaps from your spouse’s self-employment activities. You may have also been under the impression that your spouse paid the taxes at the time they were due. You will have to prove you will suffer a serious financial hardship if the IRS insists you pay the taxes owed. In other words, you must be left with enough money to be able to pay your basic living expenses such as a roof over your head, food, utilities and clothing.

No assets may have been transferred between spouses or any other fraudulent activity taken place and the requesting spouse must not have filed the return in question with any sort of fraudulent intent. You must prove you did not gain any sort of significant benefits from the unpaid taxes or that you suffered abuse during the course of your marriage. When there was abuse in the marriage, the spouse claiming innocent spouse relief might not have been able to successfully question anything on the joint return. If you feel you meet the criteria for innocent spouse relief you should consult a tax attorney in order to get a more comprehensive look at the overall tax situation. You want to make sure your interests are completely protected and that can be accomplished through having a qualified tax attorney on your side.

Obviously it’s a crime to cheat on your taxes or to willfully or even accidentally fail to file your taxes. That being said, in the past few years less than 2,000 have actually been convicted of a tax crime although over 4,000 are annually investigated. This number is roughly 0.0023% of all taxpayers which is a ridiculously small percentage of the population when you consider that the IRS believes at least 15% of all taxpayers are not complying with tax laws. A criminal investigation will generally begin with a special IRS agent conducting interviews with the taxpayer’s friends, family, professional advisers and anyone else with potentially incriminating information.

The IRS also believes that a full three-quarters of tax cheating is done by middle-income individuals with the remainder of the cheating being done by businesses. Businesses which deal largely in cash, self-employed handypersons and doctors are considered the worst overall tax cheaters in America. As far as under-reporting of income goes, the IRS considers car dealers, salespersons, doctors, lawyers, accountants and hairdressers to be the worst offenders.  Although such high profile tax cases as the Wesley Snipes case make headlines and strike fear in the heart of everyone who has ever fudged on their taxes, the statistical likelihood of being convicted of a tax crime is practically zero.

How People Cheat on Their Taxes

The vast majority of cheating is a result of deliberate underreporting of actual income. This is known as tax evasion which is the most commonly charged tax crime prosecuted by the IRS. The IRS has started giving a second look to deductions claimed by business owners—a crime which ranked second to tax evasion.  Claiming the first-time homebuyer tax credit comes in on the list of ways people cheat on their taxes as does working a job under the table while collecting unemployment benefits. Lying about income to qualify for government benefits and underreporting tips round out the list of the most common ways Americans cheat on their taxes. For those who make less than $200,000 per year the IRS audits approximately one in 99, however for those over that limit the number rises significantly.

What if You Get Caught for a Tax Crime?

If you are one of the unlucky taxpayers who gets tagged for an audit and the auditor catches you in a blatant tax lie you could be hit with a penalty, or the auditor has the option of referring your case to the Criminal Investigation Division of the IRS, although this is a relatively rare occurrence. Keep in mind that an IRS auditor will not tell you he is referring your case for criminal fraud prosecution but might stop your audit in midstream. Tax auditors are trained to spot any type of tax fraud including tax evasion.

The obvious examples of tax fraud would include using a false social security number, keeping two sets of books or claiming dependents who don’t exist—all of which could definitely get you in serious hot water with the IRS and potentially place you in that small category who are referred to the CID. If you have simply made inadvertent mistakes on your taxes, auditors are generally pretty understanding and fully aware of the complexity of the tax code. However, even if deliberate fraud is not an issue, you can still be slapped with significant fines. Phony deductions and exemptions can also be punished through high fines—in some cases you could pay a 75% civil penalty as opposed to an approximate 20% penalty for simply making an honest mistake.

Hiring Legal Counsel

Combatting tax fraud is never a do-it-yourself project meaning at the first sign of trouble you should immediately consult a tax attorney, or, if you have bigger IRS problems, a criminal defense attorney. Never try to lie your way out of fraud charges—in fact, keep your mouth closed until you have had the opportunity to consult with an attorney. While you probably won’t land in jail, take charges of tax evasion or tax fraud very seriously and contact an attorney who will take it just as seriously, offering professional help to get you back on track.

 

If you find yourself in the unenviable position of owing more taxes than you can pay, then it is possible you may be eligible to settle your federal tax liabilities by submitting an offer in compromise to the IRS. The amount you will offer will be less than the full amount due, however in order for the IRS to consider your offer you will have to meet certain criteria. Primarily the taxpayer must show—to the satisfaction of the Internal Revenue Service—that he or she has no way of paying the taxes owed or does not actually owe the taxes claimed. After 1992, when Offers of Compromise were widely frowned upon, the IRS decided that collecting some money was preferable to collecting none. Rather than settle on an installment agreement which could drag out potentially for years, the IRS can decide to cut their losses and take what is theoretically collectible as soon as possible and with the least amount of financial burden to the government.

Most cases of Offer in Compromise are based on the taxpayer’s inability to pay the taxes in full. Any time the IRS takes a look at a taxpayer’s financial condition and determines they will likely never be able to collect the full amount then the taxpayer can negotiate an offer that reflects the amount of equity in the taxpayer’s assets plus the amount the IRS believes they would be able to collect from future income. While there are certain cases in which the taxpayer feels the IRS has billed them an erroneous amount, unfortunately these are rare. Still, an Offer in Compromise can be used if the taxpayer couldn’t defend himself against an IRS bill yet has discovered additional evidence which proves the amount claimed is not correct. Finally, should the IRS believe a settlement would promote effective administration of taxes, they can require the taxpayer to explain any exceptional circumstances, showing either that paying the taxes in full would create a financial hardship or that such payment would constitute an unfair situation.

Pros and Cons of Accepting an Offer in Compromise

Of course there is usually a downside as well as an upside to most situations, and agreeing to an Offer in Compromise is no exception.  The benefits of accepting an Offer in Compromise include the fact that the IRS will hold off on attempting to collect money from you while they are considering your offer. Secondly, once an offer is accepted and completed, any tax liens against you will be released. Finally, an Offer in Compromise ensures the taxpayer can avoid bankruptcy, even reducing taxes that would not have been considered dischargeable in any case during a bankruptcy petition.  The downside of accepting an Offer in Compromise include the fact that the taxpayer must fully disclose all their financial information to the government—something few of us would like to do. Some tax benefits may be waived once the Offer is accepted, and a federal Offer in Compromise does nothing to resolve any other debts or taxes due to your state.

How Much Can You Reduce Your Tax Liability?

As stated, the IRS will first determine the worth of the taxpayer’s resources less other money owed which has priority over the Federal tax lien on a discounted basis, then will add in a determination of the taxpayer’s ability to make future payments.  In evaluating the taxpayer’s future income prospects, the taxpayer’s education, profession, trade, age, experience, health and past and present income will all be considered to make a determination. One formula the IRS may use to determine your future income is to subtract the necessary monthly living expenses from your monthly income over 4-5 years. These figures added together will equal what the IRS will be willing to accept for the amount you owe. Remember, that once you have entered into an Offer in Compromise Agreement with the IRS you absolutely must remain current on all tax obligations for a period of five years or you risk having your agreement revoked. It can be to your advantage to have a tax attorney help you navigate this type of agreement so you can be sure  your interests are being protected.