So, your spouse — or ex-spouse or soon-to-be ex — has been less than honest about a few things tax-wise. [i]
Maybe your spouse earned money on a side gig that was never reported on your joint tax return. Or claimed an exaggerated deduction for donating a household item. Perhaps even mischaracterized a large expense just to gain a deduction, like claiming veterinary bills as your medical expenses. Now the IRS wants more in taxes. Maybe a lot more.
As a general rule, if you sign a joint tax return, both you and your spouse or ex are responsible for everything on that return. It’s referred to as joint and several liability.
That means if the IRS finds you underpaid your taxes and can’t find your spouse or your spouse can’t pay, you’re potentially liable for everything. Not just your portion, or half.
Even if you have a divorce decree that states your ex-spouse is responsible for the taxes on previously filed joint tax returns, you can still be held liable for the entire amount by the IRS.
Unless, of course, you qualify as an innocent spouse.
An Innocent Spouse and the IRS
Very generally, an innocent spouse is a person who filed a joint federal tax return with a spouse or ex-spouse and that return erroneously left off items of gross income or claimed invalid deductions. A qualifying innocent spouse is deemed not knowledgeable regarding some or all of those errors, and therefore not liable for the related tax consequences.
If you are considered an innocent spouse by the IRS, that typically means you won’t be held liable for certain taxes, interest and penalties related to the joint tax return with the underpayment. This relief from joint and individual liability applies only to income taxes and self-employment taxes.
Notably, innocent spouse relief doesn’t necessarily apply to the entire return. You can be deemed an innocent spouse with respect to certain items on the return and not others. You can also be deemed an innocent spouse with regard to only a portion of an item on the return.
Innocent Spouse vs. Injured Spouse
It is important to distinguish an innocent spouse from an injured spouse. If you are an injured spouse, you are married and filed a joint return with your spouse that showed an overpayment. The funds from that tax overpayment were, or will be, used to pay for your spouse’s legally enforceable debts. Examples include past due and unpaid taxes, student loans or child support payments.
So if you’re filing for relief as an injured spouse, you’re asking for your share of a refund, not relief from the joint and several liability that results from a joint tax return.
Types of Tax Relief for Spouses
As an innocent spouse, you may be eligible for any of the following forms of tax relief:
Innocent Spouse Relief
Relief by Separation of Liability
Innocent Spouse Relief
With innocent spouse relief, you may not be held liable for certain taxes, interest and penalties related to the joint tax return that has the underpayment.
To qualify for federal tax relief as an innocent spouse you must meet all of the requirements listed below.
The joint tax return you filed with the IRS understates the amount of tax actually due as a result of erroneous items on the return. Erroneous items consist of either income received by your spouse that was unreported, or claims made by your spouse that resulted in incorrect deductions, credits or property basis amounts.
You can demonstrate that you did not know of the tax understatement — in other words, had no actual knowledge — and had no reason to know of it, when you signed the tax return.
Actual knowledge refers to any of the following:
You knew about actually receiving an item of income that wasn’t reported on the tax return.
You were aware of facts the meant you couldn’t claim a deduction or credit that actually was claimed on the tax return.
You knew that, for a deduction claimed on the tax return, the related expenditure either didn’t occur or the amount was inflated.
Reason to know typically applies to individual items on the return and is established based on the specific facts and circumstances. The determination is based on such things as the nature and amount of the item, your background and business experience, whether the item departs from tax filings in years past and whether a reasonable person would have been suspicious.
Based on all of the facts and circumstances, it would be unfair to hold you liable for the tax underpayment. For example, the IRS may consider whether your spouse deserted you, if you’ve divorced or separated from your spouse, and whether you received a significant benefit from the understatement, among other factors.
You haven’t participated in a fraudulent scheme which resulted in the transfer of property with your spouse. Such a fraudulent transfer includes schemes to defraud the IRS or a third party — such as a creditor, business partner or ex-spouse.
Relief by Separation of Liability
Not surprisingly given the name, with this kind of relief you separate your portion of the total tax liability plus interest and penalties from that of your spouse.
To qualify, you must have filed a joint return with your then-spouse and meet one or both of the following requirements:
You are currently divorced or legally separated from your spouse, or you are a widow/widower.
During the previous 12-month period, ending on the date you filed for tax relief, you did not live in the same household as your then-spouse. This means you live apart on a permanent basis and are estranged from one another.
As with the innocent spouse relief, you can’t have fraudulently transferred assets and can’t have had actual knowledge regarding your spouse’s erroneous items on the tax return. However, there is an exception to the actual knowledge requirement for victims of domestic abuse. According to the IRS, the abuse must have happened before you signed the return and therefore you were afraid of retaliation if you challenged any of the items on the return.
The burden of proof is on you to demonstrate the basis upon which you allocated the tax related amounts and that you met the other requirements for this type of relief.
Equitable Relief Rules
If the IRS determines that you don’t qualify for innocent spouse relief, relief by separation of liability or relief under some form of community property law (explained below), it’s possible you may qualify under the equitable relief rules. The relief applies in the case of a tax understatement or underpayment.
To qualify, you must satisfy a number of requirements. For example, you did not pay the tax and the underpayment or failure to file was not part of a fraud or similar scheme. Further, the tax liability in question arose from an item on the return that can be attributed to your spouse and that you were not aware of. As a result, it just wouldn’t be fair to hold you responsible.
In determining whether to grant you relief, the IRS considers a range of factors that include if you’re divorced or permanently separated, how much hardship not granting relief would cause, the terms of a divorce decree, how knowledgeable you were about the issues in the return and whether the unpaid/underpaid tax provided you with a significant benefit.
The Impact of Community Property Rules
In general, if you live in a community property state, are married and file a joint return, you must adhere to community property laws when preparing and filing your return. That means you’re entitle to half of your community income and expenses.
However, the community property rules do not apply when determining the joint or individual liabilities for an understated or underpaid amount on a federal joint tax return. Instead, the three forms of innocent spouse rules discussed above still apply.
If you’re married and live in a community property state and you have unreported income but did not file a joint federal return, there is an additional relief option. You won’t be held liable for an item of income if all of the following requirements are met:
You didn’t file a joint tax return.
You didn’t include the item in question in your gross income.
The item of income wasn’t your spouse’s (or former spouse’s) compensation or self-employment income, partnership income or income/property that belongs to your spouse under community property law.
You did not know about the unreported income and had no reason to know about it.
It would be unfair to include the unreported income in your gross income, given all of the facts and circumstances involved.
Filing for Relief
Before you decide to file for relief as an innocent spouse, understand that the IRS will contact your spouse or ex-spouse as part of the process. That is true even if you are, or have been, the victim of domestic abuse.
To apply for relief, you file Form 8857, Request for Innocent Spouse Relief with the IRS, under penalty of perjury. For either innocent spouse relief or relief by separation of liability, you only have until two years after the IRS first tried to collect the tax in order to file for relief.
It’s a bit different for equitable relief. The timing depends on the type of relief you’re seeking. If you’re requesting relief from a balance due, you must request relief during the period of time the IRS can collect the tax from you. Generally, that’s 10 years.
On the other hand, if you’re seeking a refund of tax you’ve already paid, you have to request relief within the statutory period for seeking a refund. Typically, that’s the later of either three years after the return’s filed or two years after the tax is paid.
[i] Generally, references to spouse throughout include ex-spouse and soon-to-be ex-spouse.
An innocent spouse with a tax problem