When Happily Ever After Isn’t: Innocent Spouse Relief

Your Guide to State, Local, Federal, Estate + International Taxation

The union of two people in life generally comes with optimism for the future; a hope for the life that will be “happily ever after”. Reality however, can sometimes have a different agenda. There are situations where one spouse or ex-spouse finds themselves on the wrong side of the IRS for a jointly filed tax return. Innocent spouse relief may provide a needed reprieve for them.

When a joint income tax return is filed, the tax law holds both of the spouses responsible for the entire tax liability. This is referred to as joint and several liability. Under the provisions of joint and several liability, the parties are responsible for not only the tax liability shown on the return but any additional tax liability the IRS may later assess resulting from changes to the return. While a divorce may sever your ties with your spouse, the bond with the IRS holding you responsible remains as strong as ever. Provisions in your divorce decree holding your former spouse responsible for the tax will not keep the IRS from attempting to collect the tax from you under the joint and several liability principles. Relief can be sought through the innocent spouse relief provisions.

There are four types of relief available: (1) innocent spouse relief, (2) separation of liability relief, (3) equitable relief and (4) relief from liability for tax attributable to an item of community income. To qualify for innocent spouse relief, you must have (1) filed a joint return for the year; (2) have an understated tax on the return due to erroneous items of the person with whom you filed the return; (3) can show that when you signed the return you did not know and had no reason to know that the understated tax existed; (4) taking into account all the facts and circumstances, it is held that it would be unfair to hold you liable for the understated tax; and (5) you have made a timely election to qualify for relief. All five of the criteria must be satisfied by the taxpayer to qualify for relief under the innocent spouse provision. Each of the other types of relief has their own qualifying criteria.

Innocent spouse relief is not automatically granted. Form 8857 is filed with the IRS to request the innocent spouse relief. The form should be filed as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. If the IRS has begun collection actions to collect a tax that you believe the innocent spouse relief provision should apply to, you must file the form no later than two years after the first attempt by the IRS to collect the tax. It is the taxpayer’s burden to prove to the IRS that they qualify for relief under the applicable provision.

The IRS will review and make a determination if you qualify for relief. Your spouse or former spouse will be contacted by the IRS and asked if he or she would like to participate in the process. After review, the IRS will issue a preliminary determination letter to the requestor and the spouse or former spouse. If neither party appeals the decision, the IRS will then issue a final determination letter to both parties.

It may not be your “happily ever after” – but if you qualify for relief under the provisions, you may be back on the road to finding it.

By Cheryl Dickerson, CPA