IRS Innocent Spouse Relief
Innocent Spouse Relief Attorney Services
Married taxpayers will many times file joint tax returns with their spouse in order to obtain tax benefits. For example, a lower tax rate. However, in doing so, each spouse becomes jointly and individually liable for any tax shown owing on the return (including, penalties and interest) and any additional taxes, penalties and interest resulting from an audit. This would include the situation where only one spouse was responsible for the underreported income or improper deduction. Even in that case, both spouses are jointly and individually liable. The good news is that you may qualify for innocent spouse relief. In order to see if you qualify for innocent spouse relief, you should consult with an innocent spouse relief lawyer. Located in California, innocent spouse relief attorney services are provided to taxpayers nationwide. In these cases, it is important that the facts surrounding the tax liability are obtained and then framed by innocent spouse relief legal counsel in the best possible legal posture. This involves analysis of the facts and integrating such with legal authorities and citations. In a typical innocent spouse case, the husband is self-employed. The husband didn’t report all of his income on the joint return. The wife didn’t know about the unreported income and didn’t benefit from it. A separation and divorce takes place. The IRS conducts an audit, discovers the unreported income, and assesses additional taxes, interest and penalties. But now, the “husband” can’t be found or may not have the ability to pay. The IRS is seeking payment for the liability and goes after the easiest target, in this case the “wife”. In other situations, one spouse may have died and the surviving spouse only learns of the tax problems after his or her spouse’s death. There are different types of innocent spouse relief available. They include:
- Innocent spouse relief
- Separation of liability
- Equitable relief
INNOCENT SPOUSE RELIEF
Do You Qualify as an Innocent Spouse?
To determine if you qualify for innocent spouse relief, the services of an Innocent Spouse Attorney can help determine if you meet the rules for relief from liability. Unless you qualify for relief, the IRS will take action against you for the understatement of taxes (together with resulting interest and penalties) where your spouse (or former spouse) omitted items (e.g., failed to report income) or otherwise improperly reported items (e.g., claimed erroneous deductions or credits) on your joint return. With this type of relief, married taxpayers who are still living with their spouse can still qualify for relief from the understatement of tax (and resulting penalties and interest).
IRS Innocent Spouse Relief Requirements
You must meet all of the following conditions to qualify for IRS innocent spouse relief.
- You filed a joint return which has an understatement of tax due to erroneous items, defined below, of your spouse (or former spouse).
- You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax. See Actual Knowledge or Reason to Know, defined below
- Taking into account all the facts and circumstances, it would be inequitable (unfair) to hold you liable for the understatement of tax. See Indications of Unfairness for Innocent Spouse Relief, below.
- You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
Erroneous items are either of the following.
- Unreported income. This is any gross income item received by your spouse (or former spouse) that is not reported.
- Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse).
Erroneous items – examples.
- The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising.
- The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.
- No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family’s two dogs.
Actual Knowledge or Reason to Know
If you actually knew about an erroneous item belonging to your spouse (or prior spouse), this relief provision doesn’t apply to any part of the understatement. Both you and your spouse remain jointly liable. Further if you had reason to know about an erroneous item belonging to your spouse (or prior spouse), this relief provision doesn’t apply to any part of the understatement. Both you and your spouse remain jointly liable. In determining whether you had reason to know, the IRS will review the facts and circumstances. This is a common reason for the IRS rejecting this relief provision – specifically, that a reasonable person had reason to know of the understatement of tax due to an erroneous item. Among the facts and circumstances taken into account are: the nature of the erroneous item; you and your spouse’s (former spouse’s) financial situation; your educational background and business experience; the extent of your participation in the activity that resulted in the erroneous item; did you fail to ask, at or before the time the return was signed about the items that a reasonable person would have questioned; and whether the erroneous item was a departure from a recurring pattern in prior returns.
Partial Relief when the extent of the understatement unknown
You may still qualify for partial relief if, at the time you filed the joint return, you didn’t know or have reason to know of the extent of the understatement. In this case you would be relieved of liability for a portion of the understatement of tax, penalty and interest.
Inequitable (unfair) to hold you liable for the understatement of tax
The IRS is to consider all the facts and circumstances of your case in order to determine whether it s inequitable to hold you liable for the understatement. Numerous facts and circumstances are taken into account, including, whether you received a significant benefit, and whether your spouse (or former spouse) deserted you.
2 Year Rule
Additionally, you must elect this relief not later than the date which is 2 years after the IRS began collection activities against you.
Divorce Decrees – are not binding on the IRS
The IRS is not bound by your divorce decrees and otherwise legally binding agreements between the parties.
What if you don’t qualify under the above Innocent Spouse Relief Provision? As an experienced Tax Attorney, assistance and guidance can be provided as to:
- Seeking Relief by Separation of Liability
- Seeking Equitable Relief
- Structuring a viable collection alternative with IRS collections. For example, an Offer in Compromise, Installment Agreement, or other resolution