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Understatement of income vs. underpayment of tax

When dealing with a situation where a spouse has been untruthful to not only the IRS, but their spouse, it is important to understand what kind of help an innocent spouse can receive.

An understatement of income occurs when a spouse, without the knowledge of the other, does not include or understates that amount of income that was earned by them which should be reported on their income tax return. There are several requirements that must be met in order to be granted relief stemming from the understatement of tax.

The underpayment of tax occurs when a spouse misuses money that should have been used to pay the tax bill. This misuse happens without the knowledge of the other spouse. Generally, underpayment of tax is not an action where a claim for innocent spouse relief can be used.

Congress has carved out the possibility of relief for the innocent spouse on equitable grounds.

For the taxpayer to be eligible for relief of the underpayment of tax, they must show that:

  1. They are no longer married to or are separated from the non-requesting spouse or has not been a member of the same household at any time during the 12-month period ending on the date of the request for relief,
  2. the spouse requesting relief did not know or have reason to know that the non-requesting spouse would misuse the funds set aside to pay the tax liability, and
  3. the requesting spouse would suffer an economic hardship if they were held to pay the tax liability. (Rev. Proc. 2003-61)

It is possible to qualify for relief due to an underpayment of tax, but such a request must show that you truly qualify by meeting the three requirements above. I am David W. Klasing andI have 20 years of combined experience as a Tax Attorney and CPA. I can help you make sense of what is going on with your tax issues. Once we determine whether your spouse has understated or underpaid, I can assist you in filing the necessary request and assist in the process in gathering evidence to prove-up your innocent spouse claim. If your claim is denied, I can help you have your request heard by the United States Tax Court.