Sam Brotman, JD, LLM, MBA January 15, 2014 5 min read

Innocent Spouse Relief & Actual Knowledge

Innocent Spouse Relief

This is the most commonly known form of relief, which can absolves a taxpayer from liability if their spouse or former spouse either did not report income, made an error in the calculation of income, or misapplied any deductions or credits that they were not entitled to.[1] Innocent Spouse Relief relieves a person of any tax, interest, and penalties associated with the account based on the preceding errors. However, the taxpayers are still held jointly and severally liable for any amounts that are not granted innocent spouse relief. The following requirements must be met in order for innocent spouse relief to be granted.

1. You filed a joint return

2. There is an understated tax on your return, i.e. the IRS determines that your total tax should be more than the amount that was actually shown on your return.

3. That amount is due to erroneous items of your spouse

4. You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed (Absence of “Actual Knowledge” or “Reason to Know”).

5. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. (“Unfairness”).[2]

Actual Knowledge/Reason to Know

The actual knowledge or reason to know test is governed by the principal that the IRS will not deem you an innocent spouse if you were aware of the tax deficiency at the time the return was filed. That knowledge, in the government’s eyes would make you an accomplice to the understatement of tax. Because proving an individual’s actual knowledge can be difficult, the government eased its burden and only has to prove that a person should have had “reason to know” of the deficiency. Reason to know is often referred to as willful blindness in other areas of the law and the IRS will consider all the facts and circumstances surrounding a liability when determining whether innocent spouse relief should be granted. Among the things that the IRS will consider:

  • The nature of the erroneous item and the amount of the erroneous item relative to other items
  • The financial situation of you and your spouse (or former spouse)
  • Your educational background and business experience
  • The extent of your participation in the activity that resulted in the erroneous item
  • Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question.
  • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (for example, omitted income from an investment regularly reported on prior years’ returns).[3]

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[1] Tax Topic 205 - http://www.irs.gov/taxtopics/tc205.html

[2] IRS Publication 971

[3] IRS Publication 971

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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