Seeking Innocent Spouse Relief for Tax Liability Arising from a Joint Tax Return

Most married couples select “married filing jointly” for their federal income tax filing status because it will typically result in a reduced tax liability.  Despite this financial advantage, filing a joint tax return also has a disadvantage because you are financially responsible for any unpaid tax, penalties and interest if there are inaccuracies when you sign a joint tax return.  Even if your spouse owns a business that generates all of your household income, the IRS can pursue its harsh enforcement penalties and seek the entire amount owed from you.

When signing a joint tax return, you should carefully review every line of the tax return to confirm its accuracy.  If you are not involved in a spouse’s business and have separate bank accounts, you may have no idea that the information on the joint tax return is inaccurate because of an inadvertent error or intentional misrepresentation by your current or former spouse.  The Internal Revenue Code is designed to protect a spouse in this type of situation, but this exception to joint and several tax liability is extremely narrow so it is difficult to qualify.

The conditions that must be met to qualify for innocent spouse relief include:

• The understated tax liability is a result of an error by the spouse of the requesting party, such as undisclosed income, inapplicable credits and deductions or underreported earnings.
• The party seeking innocent spouse relief did not know and did not have reason to know that the return underreported tax liability when the return was signed.
• It would be unfair to impose liability for the tax on the requesting party under the surrounding circumstances.

There are a few nuances that impact eligibility under the above criteria.  If a spouse was aware of the understated tax under the second criteria above but not the extent of the underpayment, the taxpayer may qualify for partial relief for responsibility for the unpaid tax.  The IRS will also consider whether the party seeking relief benefited from the underreported tax obligation in the form of a more affluent standard of living and whether the parties who signed the joint return were later separated or divorced.

The IRS may also grant two other forms of relief beyond innocent spouse status: (1) relief by separation of liability and (2) equitable relief.  Relief by separation of liability involves allocating the unpaid tax liability between the spouses.  This form of relief may be authorized if the parties are separated or no longer married or the parties were not members of the same household during the year covered by the tax return.  If the IRS is able to establish that the party requesting this form of relief had actual knowledge of the erroneous information on the tax return or colluded with his or her spouse, this form of relief will not be granted.

When neither innocent spouse status nor relief by separation is an option, a spouse may seek equitable relief.  When there has not been any fraud, the taxpayer may be granted relief based on fairness.  The factors that the IRS may consider in assessing whether relief is appropriate may include economic hardship, separation and divorce and other factors bearing on the unfairness of imposing liability on the requesting spouse.

If you are facing tax liability based on a joint return and have questions about innocent spouse status, you should contact experienced tax attorney Paul Grego.  We offer a free initial consultation so that we can evaluate your eligibility for tax relief and explain your options.  Call us today at 504-302-4949 or email us.