When a married couple files a joint tax return, each spouse is legally responsible for the entire tax liability, even if only one of the spouses is responsible for the failure to pay. Known as joint and several liability, this legal concept still applies after a divorce and even in cases of misrepresentation or fraud. In the past, the IRS offered Innocent Spouse Relief in order to protect a spouse who did not know or have reason to know that an understated tax existed. Last year, the IRS announced a revision of the Innocent Spouse Relief program so that knowledge that the tax return was incorrect is no longer fatal to a claim for relief.
When taxpayers sign their tax returns, they are declaring to the IRS that their return is correct. With a joint tax return filed by a married couple, both spouses are responsible for the entire amount due, meaning that if the IRS later determines that a joint return was incorrect, it can go after either spouse for the entire amount of any additional tax, interest and penalties. The IRS is not even bound by a divorce decree stating that only one of the spouses is solely responsible for back taxes.
Recognizing this possible injustice, the IRS has offered various forms of Innocent Spouse Relief since 1971. However, the program has had several restrictions. For instance, relief was denied for spouses who knew or had reason to know that they signed an incorrect return, even if the signature was made under duress. In addition, to apply for relief, the IRS imposed a two-year statute of limitations from the date on which the IRS first contacted the innocent spouse to collect the tax. Because of these restrictions, many otherwise-qualified innocent spouses were held liable for taxes for which the other spouse should have been held responsible; 85 percent to 90 percent of these were women.
Last year, the IRS revamped the Innocent Spouse Relief program. Based in Florence, Ky., the Innocent Spouse unit was assigned increased staff and agents were provided training on domestic abuse and how to interview petitioners. The IRS also increased the statute of limitations to apply for relief to 10 years and relaxed the requirement that the innocent spouse did not know the return was incorrect when it was signed. Now the IRS is more likely to grant relief in cases of abuse or when one spouse had financial control over money matters during the marriage. Cases will also be evaluated to determine whether the innocent spouse signed the joint return while suffering from physical, psychological, sexual or emotional abuse.
To apply for Innocent Spouse Relief taxpayers must file Form 8857, which the IRS uses to begin its evaluation under a facts and circumstances test. Form 8857 contains questions about how involved the spouse was in the household’s finances, whether he or she assisted in preparing the joint tax return, and whether the spouse suffered from abuse.
Innocent Spouse Relief is one way to avoid joint and several liability, but the most straightforward technique is to not file a joint tax return at all. All married couples have the option of filing under the Married Filing Separately designation. In fact, the advantages of joint returns are not as abundant as is commonly believed, especially for two-income households where each spouse makes a similar amount. A joint return really only lowers the overall tax bill when one salary is responsible for the bulk of the income. However, those filing taxes under the Married Filing Separately designation are ineligible for certain tax breaks, including the Earned Income Credit, child and dependent care credits and the student loan interest deduction.
Tax professionals can provide assistance in determining whether a joint tax return or a Married Filing Separately return is best for your particular situation. In addition, with many more people now eligible under the Innocent Spouse Relief Program, seasoned tax professionals are recommended for the often long and complicated application process.
