Married couples know there are many benefits to filing joint tax returns. Many are not aware that when they sign a joint tax return, each spouse is jointly and severally liable for unpaid or underreported tax due. That means the Internal Revenue Service can collect the taxes from either spouse.
Regardless of whether the couple is still married, or has since separated or divorced, the Internal Revenue Service holds each spouse liable for underpayment or underreported taxes during the marriage. But, a spouse can avoid tax liability in such circumstances if he or she qualifies for one of the three forms of relief – innocent spouse, separation of liability, equitable – available under federal law.
Innocent Spouse Relief
To be considered for innocent spouse relief, the requesting spouse must have filed a joint return that had an understatement of tax that is solely attributable to the non-requesting spouse’s omission of income, deduction or credit; prove that at the time the requesting spouse signed the joint return, he or she did not know and had no reason to know that there was an understatement of tax; and prove that it would be inequitable -- unfair -- to hold the requesting spouse liable for the understatement of tax.
Importantly, relief must be requested within two years after the IRS begins collection efforts. Collection efforts include, but are not limited to, receiving a notice from the IRS or the filing of a lawsuit against the requesting spouse for collection of the joint tax liability.
If the requesting spouse knew, or had reason to know about the understatement, the requesting spouse will remain liable.
In deciding whether a requesting spouse had reason to know about the understatement, the IRS considers the nature of the understatement and the amount, the financial situation of the requesting spouse and non-requesting spouse, the requesting spouse’s education and business experience, the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item, whether the requesting spouse failed to ask about items on the return that a reasonable person would question and whether the erroneous item represented a departure from prior years’ returns.
Separation of Liability Relief
Under separation of liability relief, the IRS allocates the understatement of tax between the taxpayers based on the income and deductions attributable to each spouse’s earnings and assets. If successful, the requesting spouse is relieved of the tax liability that belongs to the non-requesting spouse.
To obtain separation of liability relief, the requesting spouse must have filed a joint return; be divorced, legally separated, widowed, or not have lived in the same household for the twelve months before asking for relief; and ask for relief within two years after the IRS begins collection efforts from the requesting spouse.
Similar to innocent spouse relief, relief is not available if the IRS proves that the requesting spouse had actual knowledge of the erroneous item.
Equitable Relief
If the requesting spouse does not qualify for innocent spouse relief or separation of liability relief, he or she may still qualify for equitable relief. The IRS grants equitable relief when, based on the facts and circumstances, it would be unfair to hold the requesting spouse liable for the unpaid or underreported tax.
Equitable relief does not have the two-year requirement found in innocent spouse and separation of liability tax relief. If the taxpayer requests relief more than two years after the IRS began collection efforts, where the amount of the reported tax was accurate but was not paid, the innocent spouse may still be granted equitable relief.
Equitable relief requires that the requesting spouse must have filed a joint return for the taxable year for which relief is sought; must not be eligible for innocent spouse relief or separation of liability relief; must have filed a timely claim for relief which, in this instance, is generally 10 years after the tax has been assessed; must not have transferred assets as part of a fraudulent scheme, such as for less than the assets’ value; must not have been a part of transferring assets for the purpose of avoiding tax; and must not have knowingly participated in the filing of a fraudulent joint tax return.
In addition, the tax liability must be attributable to an item of the non-requesting spouse or an underpayment that results from the non-requesting spouse’s income.
Taxpayers who are targeted by the IRS for underreporting or underpayments should move quickly to work with a lawyers who has experience in tax matters. Goodell DeVries can help with tax issues. For more information call Kaitlin Corey, Esq. at 410-783-3550.