When married taxpayers file a return, they may elect to file that return jointly with their spouse. Sometimes that is a mistake – a big one! When filing a joint return, the Internal Revenue Code provides that both spouses will be jointly and severally liable for the tax, penalties and interest. This blog has reviewed the various options available to spouses requesting that they be relieved from liability on the return. Just click on “Innocent Spouse Relief” under “Posts by Category” for a general review. Lately, we are seeing the IRS take action to update their analysis of Innocent Spouse Applications.
General guidelines provide that understatements of tax may qualify for relief under so-called “innocent spouse” or “separation of liability” provisions, while underpayments may only qualify under “equitable relief” provisions. All three of these are under the umbrella of “innocent spouse relief” provided by the Internal Revenue Code.
Of note, earlier this year, the IRS updated internal guidance. One change made to internal guidelines earlier this year was to clarify provisions relating to actual or constructive knowledge of the understatement of tax. Basically, in order to qualify under this particular type of Innocent Spouse relief, it is necessary to show that the requesting taxpayer did not know about the understatement and had no reason to know of the understatement. If this requirement isn’t met, then the requesting spouse doesn’t qualify. However, if the requesting spouse can establish that he or she was the victim of domestic abuse prior to the time that the return was signed, but did not sign the return under duress, and as a result of the prior abuse, did not challenge any of the items on the return for fear of retaliation, then the IRS will not review the requirement of showing that the requesting spouse did not know or did not have reason to know of the understatement.
Normally, the IRS will review the following factors to determine if the requesting spouse knew or had reason to know of the understatement, absent a showing of abuse: 1) the nature of the erroneous item and the amount of the erroneous item relative to the other items, 2) the couple’s financial situation, 3) the requesting spouse’s educational background and business experience, 4) the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item, 5) whether the requesting spouse failed to inquire, at or before the time the return was filed, about items on the return or omitted from the return that a reasonable person would questions, and 6) whether the erroneous item represented a departure from a recurring pattern reflected in prior year’s returns.
The IRS has pending the finalization of procedures that weigh abuse in a spousal relationship more heavily in the analysis of relief under Innocent Spouse provisions. Some of the changes mentioned here are based in internal guidelines associated with working applications for relief and acknowledge the proposed official guidance. Should you have questions about Innocent Spouse relief, don’t hesitate to contact our office.