I begin this column with a disclaimer that I always make to my clients whenever they have questions about taxes: I do not claim to be a tax lawyer or accountant. While I know some general information about taxes and the Internal Revenue Code, before doing anything, check with a tax lawyer, an accountant or other tax professional.
That being said, as all matrimonial practitioners know, this is the time of year when issues involving income taxes suddenly loom large in clients’ concerns. A major issue involves one spouse’s worry over the other’s possible failure to report income on a joint tax filing, i.e., whether a spouse who unknowingly signed a joint return may be held liable for the other’s violation.
The IRS has long permitted an unwitting spouse to request that he or she not be held responsible for the other’s failures. In the past the IRS rarely granted this relief; however, 2011 saw some loosening of requirements.
To request relief under an “innocent spouse” claim, the applicant must file Form 8857. The filing should be made as soon as the applicant becomes aware of a liability, and, with a few exceptions, must be made within two years after the IRS first tried to collect the tax.
An exception to the two-year rule is allowed under the July 25, 2011, “equitable relief” notice. If an applicant is requesting relief from a balance due, he or she must file the request within the time the IRS has to collect the tax. This time period is usually 10 years but may be longer if a suspension of collection was in effect. If the applicant is seeking a credit or refund, the filing must be made within three years after the tax return was originally filed or two years after the tax was paid — whichever is later.
If the applicant wants both relief from a balance due and a credit or refund, the time period for credit/refund applies to payments already made and the balance due time period applies to any unpaid amounts.
In order to qualify for relief under the innocent spouse provisions, the applicant must have filed a joint return, and there is understated tax on the return due to “erroneous items,” and the applicant can show that in signing the return, he or she did not know and had no reason to know about the understated tax or the extent of the understatement.
“Erroneous items” means unreported income, or an incorrect deduction, credit or property basis claim made by the other spouse. The IRS then determines whether under the facts and circumstances it would be unfair to hold the applicant liable. Factors considered include whether the applicant received a “significant” benefit, i.e., any benefit exceeding “normal support.” Of course, the definition of “normal support” is elusive and will be defined by the IRS in each case.
There is also a “separation of liability” relief. This allows the understated tax plus interest and penalties to be allocated between the spouses, and is only available in cases in which the liability is unpaid. For this sort of relief, the applicant must have filed a joint tax return and either is no longer married to the spouse or is legally separated from him or her or was not a member of the same household as the spouse anytime during the year immediately prior to the date of filing for relief.
A claim for equitable relief is the final fallback in the “innocent spouse” tax scenarios. Even if an applicant does not qualify for classic innocent spouse relief or separation of liability, he or she may be able to get help under the equity provision.
Essentially, an applicant has to plead that it is simply unfair to hold the applicant liable for the tax. Even if the applicant had actual knowledge of the understated tax, he or she may be able to qualify if the equities are especially compelling.
The above is a brief synopsis of innocent spouse tax relief. There are additional and different regulations when the spouses resided in a community property state. The IRS has abundant information and forms available online, with some of the most pertinent material included in Publication 971 at IRS.gov.
Sara Stout Ashcraft is a partner in Ashcraft, Franklin, Young & Peters LLP. She concentrates her practice in the areas of matrimonial and family law.