The story of a widow, let’s call her “Bianca,” left with a staggering tax debt after the death of her husband is neither a new nor a singular story. Bianca believed that her husband was the reliable sort and she trusted him to take charge of their finances. After they married, they filed their taxes jointly, and she never gave it a second thought.
Twenty-seven years later and a widow, Bianca found herself in court fighting the IRS over a tax debt she had not been made aware of and could not pay. Lucky for her however the year was 1998 and Congress had liberalized the innocent spouse relief rules, so the deceased husband was the only one held responsible for the boat load of unpaid taxes (see: What Innocent Spouse Relief Says about Wives and the Rest of Us by Stephanie Hunter McMahon).
There may be as many scenarios about one spouse being left burdened with tax debt after the death of the other or, more commonly a divorce, as there are being-left-at-the-alter tragedies. It happens far too often and causes more suffering after the spouses separate. This is what prompted me to address what Innocent Spouse Relief is, how and when it should be used, and the types that can be applied to specific situations.
A What Is Innocent Spouse Relief?
To begin with, if two people file a joint income tax return, the law makes both of them responsible for the entire tax liability. The IRS defines this as joint and several liability
When a divorce (or death) occurs, both spouses remain responsible for the taxes due that year, even if (in the case of a divorce) the decree states otherwise. Some lawyers fail to grasp that family court rulings do not supersede the IRS tax code.
You can seek Innocent Spouse Relief from the tax liability, including related penalties and interest if you think that your ex spouse placed you in an unfair position and should be held responsible for all or more of the money owed.
The first step you need to take is to carefully fill out and file Form 8857, which the IRS will use to determine whether one of the three types of Innocent Spouse Relief is warranted due to your circumstances. If more information is needed, the IRS will get in touch with you.
Types of Innocent Spouse Relief
So, you owe money to the IRS after your divorce or the death of your spouse? Here are the three types of Innocent Spouse Relief you could be eligible for:
Separation of Liability Relief
Under separation of liability relief, the understated tax allocated to you is generally the amount you are responsible for. The following conditions must also to be met:
- No transfer of assets has occurred between the taxpayer and spouse, or former spouse, as part of a fraudulent scheme.
- At the time the taxpayer signed the joint return, there was no knowledge of any items giving rise to the deficiency that is allocable to the spouse, or former spouse. Reason to know, as is stipulated for innocent spouse relief, is not included in this relief provision.
- The couple must be divorced, legally separated or widowed, or not living together in the same house for a 12-month period before filing for relief.
This type of relief is not available for unpaid taxes, and refunds are not allowed.
An individual may request relief by asking the IRS to partition liability. There must be liability that the other spouse was responsible for. You must have filed a joint return and meet either of the following requirements at the time you file Form 8857.
- You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed); or
- You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period which ends on the day you file Form 8857.
What qualifies as being a member of the same household?
To be considered living in separate households, you and your spouse must be estranged and not living together. The IRS would consider you and your spouse as members of the same household if:
- You and your spouse reside in the same dwelling.
- You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other’s household as explained in (3) below.
- Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education.
The key for this final factor is expectancy of return. Even if the spouse is gone for a long period of absence, if there is an expectation that they will return to the home, then they are still considered part of the household.
The request for relief must be made within two years from the date of the first collection activity with respect to the Requesting Spouse. The two-year time period for making the request is the same as required under IRC 6015(b). See IRM 184.108.40.206.1, Collection Activity, for the definition of collection activity.
Actual Knowledge Invalidates Allocation
According to the law, If the IRS can show that the Requesting Spouse had actual knowledge of the items giving rise to the deficiency at the time the return was signed, those items are not allocated to the non-reporting spouse. The IRS must show that it is more probable than not that the RS had actual knowledge of the items causing the deficiency at the time the return was signed. See IRM 220.127.116.11, Case Development, for additional information.
In plain English, what this means is that if you had knowledge of the tax liability at the time of signing your tax return, you are probably not going to be successful in allocating that liability to the guilty spouse. Theoretically, if you knew something about the liability, you could have done something about it or taken steps in the future in order to mitigate it.
Both the Knowledge and Partial Knowledge Sections, and the Domestic Abuse section apply to Allocation of Liability as well, please see above under Innocent Spouse Relief.
Items Attributable to Requesting Spouse
The Requesting Spouse may not get innocent spouse relief for any part of the liability that they were personally responsible for.
Limitations on Relief
Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations.
- The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner.
- The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse).
- Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax.
Equitable relief is only available if you meet all of the following conditions:
- You do not qualify for innocent spouse relief, separation of liability relief, or relief from liability for tax attributable to an item of community income.
- You have an understated tax or unpaid tax.
- You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme.
If you do not qualify for innocent spouse relief or separation of liability relief, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If you did not file a joint return but did not qualify for relief from liability for tax attributable to an item of community income, you may be eligible for equitable relief.
Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax, or an unpaid tax. An unpaid tax is money you accounted for and owe on your tax return, but have not paid.
Conditions for Getting Equitable Relief
In order to be considered for equitable relief from joint and several liability, you must meet similar factors as discussed in the equitable Section (D) under Innocent Spouse Relief.
What Determines Equitable Relief Eligibility?
The IRS will consider all facts and circumstances of your case in determining whether it is unfair to hold you liable for all or part of the unpaid income tax liability or deficiency. They will also consider the factors listed under the Equitable Section of the Innocent Spouse Relief, and whether they should grant full or partial relief.
Again, these factors are similar to the Innocent Spouse statute. Other factors relevant to your case also may be considered. Not one factor is determinative, instead the IRS will weigh the totality of the circumstances.
Abuse or the exercise of financial control by your spouse (or former spouse) is a factor that may impact the other factors, as described above. Please see the Innocent Spouse Relief Section under Part D to get an idea of the factors considered.
In addition to the above requirements, you must file a Form 8857 within 2 years after the date on which the IRS first began collection activity against you.
Relief Also Applicable for Taxpayers in Community Property States
Section 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. The same factors are considered as discussed above under equitable relief.
Stop Blaming Yourself and Get the Financial Relief You Deserve
Filing taxes jointly when married makes economic sense, so there is no reason to blame yourself if your ex spouse turned out to be untrustworthy. Most people elect to file jointly once they understand they can attain a better tax bracket than being married and filing separately. You also save time with fewer forms to fill out and many find additional tax credits offered.
However, once you choose to file jointly, the IRS regards your tax return as a single entity. It does not separate the incomes into “his and hers,” even if only one spouse earns the money and files the return. If it turns out that one spouse is an embezzeler or came up with some fraudulent scheme to hide income streams, as far as the IRS is concerned both spouses are culpable. Many spouses have been deceived by their partner’s financial manuevers, so the three means of innocent spouse relief I’ve talked about can and do offer some relief.
If you think you may be a candidate for separation of liability relief, an allocation of liability or equitable relief, call my office at: (619) 378-3138 to discuss your situation. You will sit down with our senior team and you will walk away with a plan of action to deal with the IRS.