Innocent Spouse Relief
Many married couples find it advantageous to file a joint tax return rather than to file separately. This comes as no surprise as the federal government has built a number of tax advantages for married couples filing jointly into the tax code. However, there are also drawbacks to filing jointly with your spouse, especially if the relationship hits a rough patch or ends in divorce. This is because by filing jointly, you subject yourself to joint and individual liability for everything that appears on the tax return. In other words, absent an exception or relief, both members of the couple are liable for everything that appears on the tax form, regardless of who prepared it. If your spouse or former spouse made mistakes on the jointly-filed taxes or took overly aggressive positions, you could find yourself liable for additional taxes, penalties, and interest.
Clients often ask: "When is applying for innocent spouse relief appropriate?"
The most common instance where issues of innocent spouse relief may come into play is where a couple is headed down the path of divorce or has already divorced. Often, one of the partners in the marriage was responsible for handling the taxes and the other partner may have only had a limited role in preparing or overseeing the taxes. In many situations, the other spouse may do little more than simply sign off on the return while trusting that his or her partner prepared the taxes thoroughly and accurately.
At some point, the spouse who participated only minimally in the tax preparation process may suspect that his or her spouse may have understated income, overstated deductions or exemptions, or otherwise violated the tax code or committed tax crimes. The innocent taxpayer does not want to remain liable for these outstanding tax debts and penalties because he or she did not create them or cause them. It may be appropriate for a spouse in this, or in a similar position, to file for innocent spouse relief.
To apply for innocent spouse relief, a taxpayer must file Form 8857 with the IRS. The form must detail and explain why the taxpayer believes that he or she is entitled to such relief. While the form seems quite simple on its face there are all sorts of technicalities which non-tax experts won't be able to readily identify. Once the Form 8857 is signed under penalty of perjury and filed, any mistakes are extremely difficult and expensive to undo. That's why we recommend that the form be prepared by a professional with lots of experience in innocent spouse cases. After the Form 8857 has been filed with the IRS all enforced collection action will come to a halt.
By filing Form 8857, you are asking the IRS to establish a separate tax liability for you that is separate and apart from that of your current or soon-to-be-former spouse, or ex-spouse. On the form, you must provide information regarding your role in the tax preparation process, whether you were aware of the income, and if you had reason to know about the inaccurate statements on the tax form. Depending upon the type of tax relief requested, the filing taxpayer may be required to prove that it would be unfair to hold him or her liable for the taxes. Whether someone is fair or unfair can be highly subjective, but the IRS has provided criteria to help in making this determination. Elements the IRS will examine include if it would be fair to impose the tax against the spouse filing for relief include:
- The nature of the erroneous item or items on the tax filing
- The value of the erroneous item or items relative to the remaining items on the tax return
- The level of participation by the filing taxpayer in the mistake or scheme
- The filing spouse's experience in business dealings
- The filing spouse's educational history
- The financial circumstances of each spouse
- Whether the filing party failed to ask reasonable questions about the return prior to authentication
- Whether the understatement is part of a recurrent pattern or an isolated incident
All of these items will be considered as part of the inquiry as to whether it would be fair to impose the tax liability and decline to provide relief. There are other options for innocent spouse relief which may be useful for some taxpayers, but other requirements may apply. For instance, an application for relief must, generally, be filed within two years of the first collection action taken by the IRS, but like everything else in the tax law there are exceptions.
Tax issues after a divorce?
While the standards to be granted innocent spouse status are high, taxpayers are entitled to appeal an IRS determination that is not in their favor to the United States Tax Court. The Brager Tax Law Group can assist you in filing either an initial application for innocent spouse status or in preparing an appeal. By securing this status you may be able to not only resolve the current debt, but will also bring most enforced collection activity to a halt. However, the extent of the relief even if granted can vary based upon the type of relief granted, the terms of the divorce decree, and even the timing of the divorce, and the division of assets. For a confidential tax consultation call our firm at 800-380-TAX LITIGATOR today or contact us online.