The Innocent Spouse Relief, Domestic Violence and the IRS: 3 Critically Types

Divorce and the Innocent Spouse Defense: What You Need to Know About Taxes

Innocent Spouse Relief provides a way for a spouse to avoid paying additional taxes if they can prove they didn’t know, and had no reason to know, about errors on a joint tax return. Separation of Liability Relief allocates tax liabilities between spouses who are no longer married, legally separated, or not living together. Equitable Relief offers assistance to taxpayers who don’t qualify for the other reliefs but would face unfair liability for understated or unpaid taxes. This defense can help those who find themselves unfairly burdened by their ex-spouse’s tax liabilities. In this article, we’ll break down the basics of the innocent spouse defense and how it relates to divorce, offering clear explanations and practical advice.

What Is the Innocent Spouse Defense?

The innocent spouse defense is a provision under U.S. tax law that allows one spouse to be relieved of responsibility for paying tax, interest, and penalties if their partner improperly reported items or omitted items on their joint tax return. This remedy is particularly important for divorced or separated individuals who might find themselves pursued by the IRS for their ex-spouse’s tax issues.

The innocent spouse defense is outlined in Section 6015 of the Internal Revenue Code. There are three types available under this section:

1. Innocent Spouse Relief: This relieves a spouse from additional tax owed if they can prove they did not know, and had no reason to know, that there was an understatement of tax when they signed the joint return.
2. Separation of Liability Relief: This applies to taxpayers who are no longer married, are legally separated, or not living together. It allocates the understated tax (plus interest and penalties) between the spouses.
3. Equitable Relief: When neither innocent spouse relief nor separation of liability relief applies, a taxpayer may still qualify for help if it would be unfair to hold them liable for the understated or unpaid tax.

Why Is This Important in Divorce?

Divorce can drastically alter one’s financial landscape. When couples file joint tax returns, both partners are generally liable for the tax due, even if they later divorce. This means that if your spouse engaged in fraudulent or negligent tax activities without your knowledge, you could still be held responsible.

The innocent spouse defense can protect you from being unfairly penalized for your ex-spouse’s actions. It’s especially pertinent in situations where one spouse was in control of the finances and the other was unaware of the tax discrepancies.

Also, what people don’t realize is that tax returns must be produced in a divorce. If a Judge is aware of a crime they must report it. This includes tax fraud.

Overview of Innocent Spouse Rules and Requirements

The IRS provides specific criteria for determining whether you qualify for this defense. Here’s a detailed overview:

1. Joint Tax Return Filing: You must have filed a joint tax return with your spouse. Joint filing is necessary because it creates joint and several liability, meaning both spouses are individually responsible for the entire tax debt.
2. Erroneous Items: The understatement of tax must be due to erroneous items of the other spouse. Erroneous items include unreported income or incorrect deductions, credits, or property basis claims.
3. Lack of Knowledge: You must prove that at the time you signed the joint return, you did not know, and had no reason to know, about the understatement of tax. The IRS considers several factors to determine whether you had reason to know, such as your involvement in the financial affairs of the marriage and your level of education and business experience.
4. Inequity: Given all facts and circumstances, it must be unfair to hold you liable for the understatement of tax. The IRS will assess whether you benefited significantly from the erroneous items.

What Is Abuse and What Is Financial Control?

Abuse and financial control can significantly affect your eligibility for this defense The IRS recognizes that these factors can limit a spouse’s ability to question or understand the contents of a joint tax return.

• Abuse: This includes physical, emotional, or mental abuse. A spouse who is subject to abuse may be too frightened to question the accuracy of a tax return or confront the other spouse about financial issues.
• Financial Control: This occurs when one spouse exerts complete control over the financial resources and decision-making process in the household. This can prevent the other spouse from having access to financial information and understanding their joint tax liabilities.

The IRS considers abuse and financial control. These factors can support a claim that you had no reason to know about the erroneous items on the tax return and that it would be unfair to hold you liable.

Classic Case

Classic innocent spouse relief applies when all four of the following conditions are met:

1. Joint Return: A joint return was filed for the tax year in question.
2. Understatement of Tax: There is an understatement of tax due to erroneous items of the other spouse.
3. No Knowledge: You did not know, and had no reason to know, that there was an understatement of tax.
4. Inequity: It would be unfair to hold you liable for the understatement of tax.

Steps to Apply

If you believe you qualify follow these steps:

1. File Form 8857: Submit IRS Form 8857, Request for Innocent Spouse Relief. You can download this form from the IRS website.
2. Provide Documentation: Include any documentation that supports your claim, such as divorce decrees, affidavits, and financial records.
3. Respond to IRS Requests: Be prepared to provide additional information if the IRS requests it during their review.

The IRS will notify your ex-spouse of your claim, and they will have an opportunity to respond. This can be a sensitive issue, so it’s essential to be prepared for this step.

Separation of Liability

If you don’t qualify you might still be eligible for equitable relief or separation of liability. For example, it may apply if you did not know and had no reason to know that the tax was understated or unpaid and it would be unfair to hold you responsible.

Separation of liability on the other hand, is available if you’re divorced, legally separated, or living apart for at least 12 months. This allows the tax debt to be allocated between you and your ex-spouse based on your respective involvement in the erroneous items reported on the return.

Practical Tips

• Stay Informed: Always stay informed about the financial and tax matters in your marriage. Understanding your joint finances can prevent future issues.
• Seek Professional Advice: Consulting with a tax professional or attorney can provide you with guidance tailored to your specific situation.
• Act Quickly: If you suspect tax issues, act quickly to seek advice from an accountant or tax lawyer. Timing can be crucial as strict deadlines apply

Conclusion

Navigating the tax implications of divorce can be complicated, but understanding the innocent spouse defense can provide significant protection. By knowing your rights and the steps to take, you can avoid being unfairly burdened by your ex-spouse’s tax liabilities.

As divorce attorneys, while we may help spot the problem, we can’t assist you with the IRS. We will work closely with your accountants. This is critical. Your divorce lawyer and your accountant should be working together to protect your rights. Don’t leave either in the dark, and again, make sure that they are talking.

For more detailed information on this defense look at this IRS webpage. But more importantly, talk to your accountant and divorce lawyer.

Call Port and Sava at (516) 352-2999 for a free 15 Minute Telephone Consultation.