Filing a joint tax return can create an unintended burden since both parties are liable for the tax due. The burden can outweigh any benefits joint filing provides, especially if the tax is not paid in full at the time it is due. Each partner is then responsible for the additional penalties or interest that accrues.
Joint and several liability is the legal concept that encompasses what married couples risk when filing jointly. Simply stated, the spouses together (jointly) are responsible for any tax liabilities, but each can be held responsible as an individual taxpayer for the entire tax bill (severally). In a way, jointly filing taxes is like co-signing a loan; someone is required to pay, and it does not matter who.
In cases where one spouse made the decision or mistake to neglect or refuse to pay taxes, how can the IRS determine which spouse is innocent? The answer is that it cannot and it does not. Although the IRS recognizes it is unfair to hold an innocent spouse responsible for the tax liability in every situation, the courts have supported the agency’s policy of targeting either spouse for the balance due.
Even in the face of a divorce decree or other legally binding agreement reached by the spouses, the IRS will try to collect from one spouse and then the other because the courts have upheld the rationale that the IRS should not be limited in its collection rights by any agreement it was not part of. The burden of determining how to pay the debt falls to the spouses as both will be approached for collection.
Fortunately, taxpayers may be able to find relief in what is commonly called “innocent spouse relief.”
Actual Knowledge Versus Reason to Know
The main eligibility requirement for innocent spouse relief is whether you can show you did not know and had no reason to know, the tax was understated when you signed the return.
The “reason to know” test is applied to determine whether someone is eligible for innocent spouse relief because the IRS will not grant a reprieve if you knew there was a problem when the return was filed. Knowing would make you an accomplice to understatement of tax and ineligible for assistance.
Since it is all but impossible to prove a person’s knowledge, the court allows for proof that the person had “reason to know” of the issue, also known as “willful blindness.” If there is strong evidence that you should have known of the problem, you will not be allowed to cry innocent.
The IRS looks at several circumstances to determine whether there is an innocent spouse, including:
- Type and amount of the error
- Financial situation of both parties, even if divorced
- Educational backgrounds and business experience
- Extent of participation by each spouse in creating the error
- Whether you asked about errors on the return, or items omitted from it, before or at the time of signing, that a reasonable person would ask.
- Whether there is the appearance of a recurring pattern over the course of several prior tax returns of the same type and amount of error
Who Qualifies for Innocent Spouse Relief?
Obviously, the couple needs to file a joint return to be in consideration for innocent spouse relief; that is a given. Otherwise, there are three criteria the spouse must meet to qualify for relief.
- One of the taxpayers believes the understatement of tax was due to an error found later by one of the spouses.
- There is evidence that one spouse did not know about the error or that the tax was understated.
- One spouse believes he or she should not be held responsible for the understated tax once all the facts and circumstances have been taken into account.
Remember, the entire argument hinges on the concept of “reason to know,” not actual knowledge. Also, the IRS defines understated tax to mean that the total tax should be more than the amount shown on the return. The most common cause of understated taxes is unreported income, often from investments.
Understated taxes also result from calculating deductions incorrectly, reporting incorrect credit, or reporting on an incorrect tax basis.
There is a time limit on how long a spouse has to request relief. IRS Form 9968, Request for Innocent Spouse Relief, must be filed within two years from the date of the first attempt to collect the outstanding debt.
What Is Included In the Rules for Relief?
The IRS includes both the time to file and the reference collection activities within the spouse relief rules. As stated before, the spouse seeking relief has two years from the first attempt by the IRS to collect the debt to file for relief under Form 8857. You should file as soon as you become aware of a tax liability that your spouse or former spouse should be responsible for.
The IRS looks at two rules for becoming aware of the liability.
Your qualification for the first rule is determined by examining your return and proposing to increase your tax liability. Certainly, if you received communication from the IRS stating you owe more money, you should be looking into your most recent tax filing activities. The second rule telling the IRS you should be aware of a problem is receiving a notice from the IRS labeled “Instructions for Form 8857.”
Collection activities can also initiate the two-year period. Rule number two above is one activity. Another is the IRS filing a claim on your behalf in a court proceeding you are party to. The IRS can file a claim involving your property, including the filing of bankruptcy.
The two-year period could be initiated when the United Stated files a suit against you to collect the joint liability, or the IRS may issue a notice of the agency's intent to levy and your right to a Collection Due Process hearing based on the Internal Revenue Code guidelines.
Other notices include Letter 11, Final Notice of Intent to Levy, and Letter 1058, Notice of Intent to Levy.
Your Spouse Will Be Contacted
In every case of request for innocent spouse relief the IRS is required to contact your spouse regarding your claim, even if you have been a victim of spousal or domestic violence. The law states both spouses are to be involved in the process.
Marriage is built on trust. If your spouse trades on that trust by understating taxes on a joint return that you subsequently sign, you will be held liable for the entire amount of taxes due if the IRS finds out. If you can show you had no reason to know there was an issue with the return, you may be qualified for relief as an innocent spouse.