Innocent Spouse Relief

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What happens when two people who were married and filed a joint return during the time they were together ended up getting a divorce and one of the people in the relationship didn’t report all of their income? Many times, the IRS will come after both spouses. But what happens if the innocent person didn’t know anything about it? They could be facing back taxes plus penalties and interest. If they signed the joint tax return, they could be facing wage garnishment or even stiffer penalties.

Luckily, there are exceptions to these circumstances, which fall under the IRS Restructuring and Reform Act. Essentially, the Act altered the tax code to make “innocent spouse relief” easier and fairer. For many, the IRS Innocent Spouse Rule may provide a solution. With the Innocent Spouse rules passed in 1998, you can qualify for “general liability relief”, “allocated liability relief” or “equitable relief” if you fail to qualify for one of the first two types. However, you should be aware that even with the passage of the Act, spousal relief isn’t always granted.

 

Steps to Take If You Are an Innocent Spouse

If for whatever reason, you suspect that your tax return may be wrong, don’t sign the joint tax return! File separately if you think your spouse falls into this category. Filing this way will result in higher tax liability, but could save a lot of pain and aggravation later on.

At Tenina Law, Inc., we have the knowledge and experience necessary to assist you with your individual innocent spouse tax situation. Dealing with tax problems like these can be one of the most stressful and problematic events of anyone’s life. you need to have a tax attorney who specializes in tax law to get rid of the IRS problems.

In your favorite streaming dramas, there’s a common scene that unfolds: federal agents burst into a luxurious mansion under cover of darkness, swiftly handcuffing either the husband or wife. As if the drama isn’t enough, the house is often ransacked, adding to the shock. To the spouse’s utter surprise, their partner has been embroiled in an elaborate scheme of tax evasion, involving staggering sums of money, ranging from millions to even billions of dollars.

But how could such a situation occur in real life without your knowledge? The answer lies in a seemingly innocent act: filing a joint tax return with your spouse and signing it. While this extreme scenario is rare, it happens all too frequently that a spouse finds themselves being questioned about suspected tax activities. Fortunately, in many cases, the mistake behind it all is a simple oversight that can be rectified, potentially saving the marriage from irreparable damage.

However, there are instances where tax fraud is a deliberate, calculated act, leaving the unsuspecting spouse in the dark and having to face the daunting task of explaining the situation to authorities. It’s a moment of utter bewilderment, as you grapple with the realization that your partner has deceived you and now expects you to clean up their mess. Moreover, this could mean that you’ll be held responsible for any liabilities arising from their actions, which adds to the emotional turmoil and humiliation.

Thankfully, there exists a provision called Innocent Spouse Relief, offered by the IRS, that can absolve you from the crimes committed by your spouse, provided you meet certain criteria. This relief brings a glimmer of hope and reassurance, knowing that at least a portion of the burden will be lifted from your shoulders. Our team has helped numerous wronged spouses navigate through these difficult situations, and we are here to extend our support to you as well.

 

The Theory of Innocent Spouse Relief

Many married taxpayers choose to file jointly because of the benefits they receive. However, filing a joint tax return comes with the additional burden that both spouses are liable for any taxes due. According to the IRS code, married couples who file jointly will be liable for any additional taxes, penalties, or interest.

The law includes a concept known as joint and several liability. This means that spouses can be held jointly responsible for tax liabilities, but they can also be held individually responsible.

In practice, the IRS lacks the resources to determine who is innocent in cases of joint liability. The IRS would have to examine thousands of accounts for joint collections and determine who should be charged with increased liability.

This has two implications. Firstly, it is now up to the parties, and not the IRS, to decide how to pay for the liability. Since both parties are responsible for the liability, the IRS may proceed with collection actions against either of them, rather than just one spouse.

Secondly, the IRS has been able to get the courts to support its policy of targeting either spouse for any balance due. Even if spouses agree on a different arrangement, they may not insist on the IRS trying to collect first from one spouse before pursuing assets of the second. The courts have also ruled that the tax agency is not bound by divorce decrees or other legally binding agreements between spouses.

This is because it would be unjust to limit IRS collection rights based on a contract to which it was not a party. However, the IRS code does recognize that it is not fair to make innocent spouses liable for all liabilities.

 

Innocent Spouse Relief Defined

Innocent Spouse Relief relieves an individual of all tax, interest, and penalties associated with a particular account due to previous errors. However, taxpayers will still be jointly and severally responsible for amounts not covered by innocent spouse relief. To qualify for IRS innocent spouse relief, the following conditions must be met.

1. You have filed a joint tax return.
2. The IRS has determined that the tax amount on your return is understated (i.e., the IRS has determined that the tax you owe should be higher than what was shown).
3. This amount is due to incorrect items from your spouse.
4. You must show that you had no knowledge or reason to know that you were underpaying tax when you signed your joint return.
5. It would be unfair, taking into consideration all facts and circumstances, to hold you responsible for an understated tax (“Unfairness”).

 

Knowledge Actual

The Actual Knowledge and Reason to Know tests are governed by the IRS principle that you will not be deemed an innocent spouse if the IRS was aware of the deficiency when the return was submitted. This knowledge would, in the eyes of the government, make you an accomplice in the understatement.

The government has eased the burden of proof by requiring only that the person had “reasonable knowledge” about the defect. In other areas of law, willful ignorance is commonly used to describe the concept of reason to know. The IRS will also consider the circumstances and facts surrounding the liability to determine whether or not innocent spouse relief will be granted.

The IRS will take into account the following factors when determining whether the spouse is liable for IRS innocent spouse relief:

• The amount and nature of the incorrect item about other items.
• You and your spouse’s financial situation.
• Your education and business experience.
• Your participation led to the incorrect item.
• If you did not ask about the items in the return at the time of signing the return, or even before, or if the return omitted information that would make a reasonable person question it.
• If the error was a deviation from a pattern that had been reported in previous years (for instance, income from an investment not included in the prior year’s returns).

 

Reason to Know

You must be able to prove that you were unaware of the understatement and had no reason to know about it when you signed your return. The IRS does not grant innocent spouse relief if you were aware of any issues when filing the tax return. Being complicit in understating taxes would disqualify you from receiving assistance.

You cannot claim innocence if there is evidence showing that you were aware of the problem.

To determine if a spouse is innocent, the IRS examines several factors, including:

• Type and amount
• Both parties’ financial situation, even after the divorce
• Education and Business Experience
• The extent to which each spouse participated in the creation of the error
• You should ask about any errors or omissions on your return before signing or when you sign. A reasonable person would do so.
• If there appears to be a pattern of errors of the same kind and amount in several previous tax returns.

 

Who Is Eligible for the Innocent Spouse Relief?

The couple needs to file a joint tax return to be eligible for innocent spouse relief. There are three criteria that the spouse must meet to qualify for relief.

1. One taxpayer believes that the tax understatement was caused by an error discovered later by a spouse.
2. It is possible that one spouse was unaware of the error, or that the tax amount was underestimated.
3. After considering all facts and circumstances, one spouse feels that he/she should not be held liable for the understated taxes.

The IRS defines understated taxes as a situation where the tax due should be higher than what is shown on your return. Unreported income is the most common reason for tax understatement.

Understated taxes can also result from incorrect calculations of deductions, inaccurate reporting of credits, or improper reporting of tax basis.

A spouse has a limited time to request relief. IRS Form 9968 (Request for Innocent Spouse Relief) must be submitted within two years from the date the debt was first collected.

 

What Is Included in the Rules for Relief?

The IRS is responsible for both the timely filing of tax returns and the collection of taxes owed.

There are rules in place for spouse relief. The IRS generally has two years from their first attempt to collect debts from a spouse. As soon as you become aware that your current or former spouse is responsible for a tax debt, it is important to file Form 8857.

The IRS examines two rules to determine your liability. The first rule involves reviewing your tax return and considering whether your tax liability should be increased. If you receive communication from the IRS indicating that you owe additional money, it is crucial to review your recent tax filings. If you receive a letter from the IRS titled “Instructions on Form 8857,” it should also raise concerns.

The two years for filing Form 8857 can be triggered by collection activities. The second rule provides an example where the IRS may file a claim in your name for a court case in which you are involved. The IRS may also file a claim against your property or pursue bankruptcy proceedings.

The IRS may notify you of its intent to levy and inform you of your right to a Due Process hearing, as outlined in the Internal Revenue Code. Additionally, Letter 11, Final Notice of Intent to Levy, and Letter 1058, Notice of Intent to Levy, may be included in the correspondence from the IRS.

 

Your Spouse Will Be Contacted

The IRS is required to contact your spouse in every case where you request innocent spouse relief. This holds even if your spouse has been a victim of domestic or spousal violence. Both spouses must be involved, as per the law.

Marriage is founded on trust. If your spouse abuses that trust by understating taxes on a jointly filed return, you will be held accountable for all taxes owed to the IRS. However, you may qualify for relief if you can provide evidence that you were unaware of the issue with the return.

If you have been blindsided by the discovery that your spouse is cheating on the IRS, please contact me. I can only imagine the devastation you must be experiencing. We will discuss your case and initiate the application process for Innocent Spouse Relief. You can rely on us to act in your best interest, freeing you from unjust financial obligations and potential legal actions. With our assistance, you can move forward in life without this burden.