Changes to Innocent Spouse Relief

With today’s divorce rate of first marriages at 50%, the ‘happily ever after’ that most people seek can be elusive. If things go sour in a marriage then they could go sour in other areas also, including jointly filed tax returns. When a couple files jointly they can be many benefits, but they are also both fully responsible for any taxes owed, interest and penalties. This also applies to any couple that lives in a community property state even if they file separately. This can detrimental to anyone going through a divorce financially if the person filing the return underreports or over deducts.

There is relief for the innocent spouse. The IRS has three ways to help innocent spouses with joint return that have gone awry, and they include:

  • Innocent Spouse Relief: which provides you relief from additional taxes that you may owe that your spouse failed to report, improperly reported, or if they claimed credits or too many  deductions.
  • Separation of Liability Relief: allocates additional taxes owed between you and your former or current but separated spouse on items not reported correctly. It allows you to pay what you owe.
  • Equitable Relief: may be applied for when you do to qualify for either innocent spouse relief or separation of liability for something not reported properly on a joint return, or for the right amount, but the payment remains unpaid.

In the past, the IRS has allowed a two year window to file for relief, but this has recently changed. Now as long as the statute of limitations has not expired then you can still file for relief, the two year window no longer applies. With this change, if you have applied for relief and were denied solely on the two year window, then you may reapply using the Form 8857 as long as the statute of limitations has not expired.

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Innocent Spouse Tax Filing

In the United States, married couples usually file a joint tax return. This means that both are responsible for payment of taxes to and the accuracy of the information filed on the tax return. While in most marriages this is a fair arrangement, there are times when the spouse keeps secret information that should have been filed with the tax return or lies to the spouse about payments.

Starting in 1971, the United States Internal Revenue Service began to realize that sometimes a spouse was kept in the dark for about taxable income and told by the spouse the taxes were paid when they weren’t. In 1971, the IRS wrote the first regulations for its “innocent spouse” program. Under certain limited conditions, a spouse was not held accountable for the other spouse’s actions.

In 1984, and again in 1998, the tax code was revised to give further protection to innocent spouses. This relief was badly needed, as spouses planning divorce would knowingly mislead their spouse so that both would share the tax liability when property was divided during property settlement. In 2013, the IRS announced that it was eliminating the two-year rule for request relief under innocent spouse. In fact, the rule can be applied retroactively and any taxpayer denied relief because of the two-year limitation may refile.

In addition, criminals often cheat on their taxes without their spouse’s knowledge. This is not only true of organized crime members but also people who engage in white-collar crime. The tax code provisions separate the liability so that the innocent spouse is not held responsible for the deceitful acts of their marriage partners.

In addition, a divorced spouse may elect to take an option known as the “separation of liability.” Once this option is taken, the spouse must prove that they had no knowledge of fraudulent activity. If successful, they are relieved of responsibility for falsified joint tax return.

To get relief you need to file IRS Form 8857. You only have to file a single copy of the form even if you are seeking relief for multiple years. If you want to give the IRS more information concerning your request just attach a letter with your name, address, social security number, and filing year. Send the form and any attachments to:

Internal Revenue Service
Innocent Spouse
Stop 840-F
P.O. Box 120053
Covington, KY 41012

The IRS makes it hard to get innocent-spouse relief. Over 50,000 innocent-spouse applications were filed in the past year with less than half of them getting approval. But, more than 1,500 denials were due to the two-year time limit that has been amended.

Your tax accountant is a good resource for help in filing for this relief.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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