In many families, one spouse takes primary responsibility for all the family finances, including the preparation of the joint income tax return. A joint income tax return may provide tax benefits to families that would not be available from filing two separate returns. However, in order to file a joint income tax return, both spouses are required to sign the return. The result of filing a joint tax return is that each spouse is joint and severally liable for any reported tax liability, along with any additional tax, interest, and penalties assessed on the return by the IRS. Even if the couple is later divorced, both spouses remain joint and severally liable for the total liability associated with the joint return. But is this fair to the spouse who did not handle any of the family finances? What if the spouse was also the victim of abuse or domestic violence and was prevented from accessing any of the family financial records?
Congress and the Department of Treasury have created Innocent Spouse Relief, which gives the innocent spouse the ability to request relief from the IRS for the joint liability associated with any additional tax, penalties, or interest assessed on the joint return. To qualify for Innocent Spouse Relief, the innocent spouse must meet all of the following conditions:
- the innocent spouse must have filed a joint return for the taxable year for which relief is sought;
- the joint return has an understatement of tax that is solely attributable to the other spouse’s erroneous item;
- the innocent spouse did not know, or have reason to know, there was an understatement of tax at the time the joint return was signed;
- taking into account all the facts and circumstances, it would be unfair to hold the innocent spouse liable for the understatement of tax; and
- the innocent spouse requests relief within two years from the date of the first collection activity.
See I.R.C. § 6015(b).
If a spouse does not qualify for innocent spouse relief, the spouse may qualify for separation of liability relief or equitable relief. Separation of liability relief may be available to a spouse who, at the time of the request for relief, is no longer married to, or legally separated from the individual with whom the joint tax return was filed, or the spouse was not a member of the same household as the individual with whom the joint tax return was filed during the twelve-month period ending on the date the request for relief is filed. See I.R.C. § 6015(c)(3)(A)(i). Separation of liability relief provides for the allocation of additional tax owed between the requesting spouse and the other spouse. Equitable relief may be available to any spouse who does not qualify for relief under innocent spouse or separation of liability relief. To qualify for equitable relief, the spouse requesting relief must show that it would be unfair to hold them liable for the understated tax. See I.R.C. § 6015(f). The IRS looks at a variety of factors to determine unfairness, including but not limited to, if the spouse requesting relief would suffer an economic hardship if relief is not granted. Under equitable relief a spouse may also be able to get relief from any unpaid tax associated with the return. A spouse requesting relief also has a longer time period to file for equitable relief, as a claim for equitable relief on a balance due must be filed within the time period the IRS has to collect on the assessed tax (generally within ten years from the date of assessment). Equitable relief rules also provide exceptions to the rule that the understated or unpaid tax has to be solely attributable to the other spouse. For example, if the spouse requesting equitable relief can prove they were a victim of abuse or domestic violence prior to the signing of the return and that because of that prior abuse or domestic violence, the spouse did not challenge the treatment of any items on the return for fear of the other spouse’s (or former spouse’s) retaliation, relief will be considered even if the understated or unpaid tax is solely or partially attributable to the requesting spouse’s item. Proof of abuse or domestic violence will also weigh in favor of granting relief even if the spouse requesting relief knew or had reason to know of the items giving rise to the understated tax but did not challenge the items because of a fear of the other spouse’s retaliation.
If you have more questions about divorce and taxes, please contact the attorneys at McClure Law Group, P.C. for consultation. Further information may also be found at the IRS website at www.irs.gov.