FINANCIAL POST

Innocent Spouse Relief

Introduction

Taxpayers who are considered married and agree to file their return as married filing jointly can report their combined income and deduct combined allowable expenses. Joint return can also be filed even if either one of the spouse had no income or deductions. However, the benefits of getting taxed at lower rate in comparison to other filing statuses also brings joint responsibility to both taxpayer and spouse, jointly and severally, for the tax, interest or penalty due on the joint return. That means that if one spouse has defaulted in either correctly reporting income or has outstanding dues towards the tax liability or has not reported the correct tax, the other spouse may be liable to pay tax as may be assessed by the IRS. But, in reality there might be some situations where the other spouse is not guilty for the acts and deeds of other spouse. In that case, the innocent spouse may get relief from the tax, interest/penalties on the joint returns for items of the other spouse that were incorrectly reported on the joint return. There are three types of relief available, namely:

1.     Innocent Spouse Relief

2.     Separation of Liability

3.     Equitable Relief

Background of Innocent Spouse Relief

      The scope of this article is restricted to take relief under Category 1 i.e. Innocent Spouse Relief. Innocent Spouse is considered eligible to take this relief if the spouse meets all of the following conditions:

1.     The return must have been filed jointly which has an understatement of tax;

2.     The understatement of tax must have been due to erroneous items of your spouse;

3.    Innocent spouse must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax;

4.     After taking into consideration all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and

5.   You must request relief within 2 years after the date on which the IRS first began collection activity against innocent spouse after July 22, 1998[1].

How to claim the relief?

File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. Cover letter explaining additional facts may also be attached if the spouse would like IRS to consider those facts.

Where to file?

Mail Form 8857 to:

Internal Revenue Service

Innocent Spouse

Stop 840-F

PO Box 120053

Covington, KY 41012

How long the entire process will take?

It may take up to 6 months before a determination is made after the request is filed in Form 8857. During the processing time, IRS is requesting your tax information and contacting the non-requesting spouse. By law, the IRS must contact your spouse or former spouse.

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This law blog is an informatory work of Dimpy Gulati who is the  Partner, Head Finance and Tax matters of Legal Imperials. She handles the financial matters of the firm.

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[1] Note: IRS has announced that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests. Also, if the taxpayer has been denied relief solely due to two year limit, may also re-apply if the collection statute of limitations for the tax years involved has not expired.