The concept of “innocent spouse” status
People who are married usually file joint federal tax returns and of course, the IRS could audit anyone’s return looking for mistakes or fraud. The problem is that in many marriages, one spouse tends to take care of financial matters like tax reporting. It is fairly common for that spouse to ask the other to just sign on the dotted line after having their joint return prepared for filing. And the spouse usually just signs because he or she implicitly trusts that their spouse provided the right information to the tax preparer.
Here is another scenario that is all too common, unfortunately. If the IRS audits such a joint return and finds that the couple owes taxes, the spouses are jointly and severally liable. This means that each is individually liable for the entire tax owed.
The audit-generated bill could arrive during the marriage, but sometimes the tax bill arrives after a separation or divorce. The spouse who did not participate in the return preparation, but signed onto it, may be shocked if the audit reveals that his or her spouse or former spouse mistakenly or deliberately underreported income, especially if the result is a large, unexpected tax bill.
Parties in a divorce who negotiate a settlement agreement may include a provision that one of them will be responsible for any tax bills that generated from jointly filed returns. The IRS does not honor such an agreement and will still hold both spouses completely liable for any future taxes, interest and penalty found due on such joint returns.
Relief for innocent spouses
The IRS recognizes that in these kinds of circumstances, one of the spouses may deserve relief from the new tax bill or in some cases a refund of taxes paid pursuant to that kind of tax assessment. Three kinds of spousal relief may be available:
- Innocent spouse: A spouse or former spouse can get relief from tax liability if the underpaid tax is due to the other spouse’s “erroneous item” that caused underpayment of tax (like understated income, wrongful or exaggerated deductions, incorrect credits or similar problems). The spouse requesting relief must not have known or had no reason to know and it must be unfair to hold the innocent spouse liable.
- Separation of liability: The agency may divide the tax liability between the two spouses who filed together if the requesting spouse did not know of the error and is a widow or if they are divorced, legally separated or have not lived together for at least 12 months.
- Equitable relief: If the first two remedies do not apply, the IRS may provide relief if it would be unfair not to under the circumstances.
This is only an introduction to a complex area of tax law. Remember, there are deadlines for requesting innocent spouse or similar relief.