Like you, most married couples elect to file a joint federal income tax return due to the financial advantages of this filing status—higher standard deductions, qualifying into a lower tax bracket, and broadened eligibility for various tax credits to name a few. Although there are several incentives for married couples to file jointly as taxpayers, there most certainly are drawbacks to filing with a spouse. The biggest of these drawbacks is most certainly the assumption of joint and several liabilities for tax debts. Given the joint filing with your wife, you too now owe for the debt she may have caused as a direct result of the lack of federal withholding taxes.
In your case, it appears that the lack of tax withholdings from your wife’s paychecks led to the liability over the course of three consecutive tax years. However, this fact alone does not necessarily qualify you for the three avenues of relief that Congress has given possible innocent spouses like yourself. The relief options available are complicated as they have various qualifying factors that must be met in order to qualify for the requested type of relief. If the IRS began taking the first collection activity on any of these three tax years over 2 years ago, then you may not qualify for either innocent spouse or for spousal allocation altogether. Please note that a more thorough review of the specific tax years, case facts and IRS collection activity would be needed to confirm whether you meet the statutory minimums. However, if it’s determined that you do qualify, then even the payments you have made under the installment agreement could eventually be recovered.
Below you can find a brief explanation of each type of relief that Congress has given to innocent spouses along with additional guidance to determine whether or not you would qualify for any of the three avenues of relief that Congress has given to innocent spouses. The three avenues for you to consider are as follows:
- Innocent Spouse Relief under IRS Section 6015(b)
You must meet all of the following conditions to qualify for innocent spouse relief:
- You filed a joint return that has an understatement of tax (deficiency) that’s solely attributable to your spouse’s erroneous item. An erroneous item includes income received by your spouse but omitted from the joint return. Deductions, credits, and property basis are also erroneous items if they’re incorrectly reported on the joint return
- You establish that at the time you signed the joint return you didn’t know, and had no reason to know, that there was an understatement of tax and
- Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax
It’s important to first determine if you are even eligible to qualify for this type of relief. Keep in mind that an innocent spouse must request such relief within 2 years of the first collection activity by the IRS.
It’s important to note that When looking at the knowledge of the taxpayer claiming innocent spouse relief, the IRS will look at many financial aspects of the marriage including the couple’s financial situation, the innocent spouse’s educational background, the level of involvement in the activity that created the erroneous item and whether a reasonable person would have inquired as to the validity of the item.
- Separation of Liability Relief or Spousal Allocation under IRC Section 6015(c);
To qualify for separation of liability relief, you must have filed a joint return and must meet one of the following requirements at the time you request relief:
- You’re divorced or legally separated from the spouse with whom you filed the joint return
- You’re widowed, or
- You haven’t been a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you request relief
If you had actual knowledge of the item that gave rise to the understatement of tax at the time you signed the joint return, you don’t qualify for separation of liability relief.
- Equity Relief under IRC Section 6015(f).
If a taxpayer does not meet one of the requirements of the statutory relief, they can request equitable relief under Section 6015(f). Certain standards must be met to qualify for this type of relief as well.
To qualify for equitable relief, you must establish that under all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. In addition, you must meet the other requirements listed in Publication 971, Innocent Spouse Relief. See Revenue Procedure 2013-34 for information about how the IRS will take into account abuse and financial control by the non-requesting spouse in determining whether equitable relief is warranted.
Until recently, the IRS took the position that because the statute of limitations for statutory relief was 2 years, a taxpayer requesting equitable relief must file within the same time-frame. However, the IRS has made the process for filing for equitable innocent spouse relief easier. The new procedure deals with the equitable relief available to taxpayers under IRC §6015(f) and §66(c). Rev. Proc. 2013-34 changes innocent spouse procedures in three key aspects.
You must file a specific form with the IRS to apply for any one of these types of relief. You should submit to the IRS a completed Form 8857.pdf Alternatively, you can also submit a written statement containing the same information required on Form 8857, which you sign under penalties of perjury. You may also refer to Publication 971, Innocent Spouse Relief, for more information.
Talking to an experienced tax attorney is the first step in determining the form of relief right for you. It’s important to develop a viable approach to secure that relief. Whether you wish to file for innocent spouse relief, wish to appeal a denial of innocent spouse relief, have questions about alternate options such as separation of liability relief, have general tax preparation questions about how to choose the optimal filing status, or have any concerns about the potential tax consequences of divorce, you should review your legal options with a dedicated attorney-CPA who can protect your best interests while negotiating aggressively with the IRS. To speak confidentially about divorce-related, separation-related, or marriage-related tax issues please contact our offices for further consultation regarding your question.
Helpful collections Q and A content:
https://klasing-associates.com/topics/innocent-spouse-relief-faq/
https://klasing-associates.com/topics/liens-levys-garnishments/
https://klasing-associates.com/topics/offer-in-compromise-faq/
Here is a link to our YouTube channel: click here!
Common issues with IRS collection actions
https://www.youtube.com/watch?v=PYaLOWpLdEo
Divorce & Criminal Tax Issues
https://www.youtube.com/watch?v=i4haBbqpz_4
What are common tax issues that nonfilers face
https://www.youtube.com/watch?v=fPxse0jStTw
