What might happen?
You got your mail today. There is a letter from the IRS. It isn't tax refund time so it can't be anything good. You are tempted to throw it away, but you open it anyway. It is a "Notice of Proposed Deficiency" that says your spouse underreported income to the IRS last year. You separated a few weeks ago. You now owe $1,000 and know you can't afford to pay it back.
Is there anything you can do?
Most of the time spouses filing a joint tax return are both held responsible for any tax debts that come from that tax return. A tax debt can be from an underpayment of taxes or an understatement of taxes. Understatements are when the tax return says that you owe one amount and you actually owe more. If your tax return does not report all your income or claims a credit you are not supposed to take, this can cause an understatement of tax. The IRS can ask for payment from just one spouse or from both. The IRS calls this joint and several liability. This usually becomes an issue when married couples separate or divorce.
Important Note: Filing jointly is an election. The IRS does not require married couples to file jointly. You can avoid joint liability by filing separately.
What kinds of relief might help me?
A spouse who thinks it would be unfair to make them pay the tax debt can apply for three different types of relief. These different reliefs are:
- Innocent Spouse relief
- Relief by Separation of Liability, and
- Equitable Relief.
The first two types of relief must be requested within two years of when collection activity begins. The last type of relief can be requested until the deadline for the IRS to collect the debt has expired.
I already applied for relief but I was rejected!
If you were denied relief because you filed your application too late, you may be able to file a new application. The IRS used to say you only had two years to apply for Equitable Relief. Now you can request this type of relief until the IRS can no longer collect on the debt.
What are the main differences between these types of relief?
To qualify for Innocent Spouse Relief the IRS requires that you did not know about the incorrectly reported income, credit or expense nor had no reason to know about it. The error has to be to an item of your spouse's, such as if he or she misreported income or misstated business expenses. Under Equitable Relief, the IRS will consider your knowledge in deciding whether you can get Equitable Relief, but it is only one of many of your circumstances they will consider. If your spouse omitted reporting interest from an account he or she had opened in your name without your knowledge, you might be eligible for Equitable Relief but not Innocent Spouse Relief.
Are there limits on when the relief is available?
Innocent Spouse Relief is not available when you correctly reported your income, credits and expenses, but your spouse underpaid your taxes when he or she mailed in your return. Equitable Relief is available in underpayment situations.
Separation of Liability is only available when you are divorced, legally separated or living in a separate household for an entire year before you file a request. If you actually knew of the problem, you are not entitled to a Separation of Liability. You cannot qualify for a refund of payments made before you requested Separation of Liability. You may be able to receive a refund under Innocent Spouse and Equitable relief. The good news is you only have to file one form. Currently this form is Form 8857.
The third type of relief is Equitable Relief. If you apply for either Innocent Spouse Relief or Relief by Separation of Liability and do not qualify for those types of relief, you may qualify for Equitable Relief.
Some of the factors that the IRS will review to decide whether to grant the relief:
- You are no longer married or you are separated and not just temporarily living apart from the non-requesting spouse.
- You would suffer economic hardship if relief isn’t granted
- You did not have actual knowledge of the problem or you did not have reason to know.
- Your spouse abused you.
- You were in poor physical or mental health when you signed the return or you were in poor health when you filed your application for relief.
- The requesting spouse has a legal obligation to pay the debt through a divorce agreement or decree.
- You have tried to follow the tax laws in the tax years following the year in which you are requesting relief.
A Case Where Equitable Relief Could Help
Example: Jim and June
Jim and June are married. Jim works construction and didn't claim his wages from one of his jobs when they filed their joint tax return. June files for a restraining order. June was abused during their entire marriage. June thought Jim had worked more jobs than he reported but did not say anything when she signed the return because she was afraid to. Jim also opened an account in June's name and forged her signature. Jim did not report the interest from this account on the tax return. Jim and June's tax return understates their taxes. June received a notice from the IRS that there is a deficiency. Without Jim's income, June can barely pay the rent and she is behind on her utilities. June can apply for equitable relief from the IRS. June could go on-line or pick up the forms from her local IRS office. Currently this form is Form 8857 This is also the type of problem that Iowa Legal Aid's Low-Income Taxpayer Clinic can assist with.
Where Can I Get Help with Tax Issues?
Iowa Legal Aid's Low-Income Taxpayer Clinic is a special project that can help low-income Iowans. Providing assistance to people who have tax controversies is one of services this project provides. For details, contact Iowa Legal Aid. Call 1-800-532-1275 to find out which office serves your county. You can also visit the Iowa Legal Aid Website at www.iowalegalaid.org. Click on "Legal Information and Other Resources" and go to the Consumer topic to find the resource titled Taking Care of Tax Troubles Caused by a Spouse for more information on "innocent spouse" relief.
The Internal Revenue Service has further information on their website on these topics at; https://www.irs.gov/taxtopics/tc205
The information in this article was not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code.