If you file a joint tax return with your spouse, you could find yourself in the precarious position of being held liable for a fraud you not only did not commit, but knew nothing about.
In cases where an innocent spouse is unfairly burdened with back tax debt based on their spouse’s noncompliance, they may be able to petition the IRS for tax relief on the basis of their own innocence. Here, we’ll discuss how to qualify for IRS innocent spouse relief and what you are required to prove to the IRS. To learn more, speak to a Fairfax VA IRS attorney at Sodowsky Law Firm, P.C.
What Is Innocent Spouse Relief?
Innocent spouse relief is one of the few means by which the IRS will let someone off the hook for unpaid back taxes. You must, however, be able to prove that your spouse incurred the tax debt without your knowledge. This can happen any number of ways. For instance, if your spouse was hiding assets and income from the IRS and there’s no way the spouse knew about it, then that would be cause to appeal on the basis of innocent spouse status.
The caveat, of course, is that you have to prove the negative. In other words, you have to show that it is very unlikely that you knew about the tax debt.
In addition, to prove that you weren’t aware of the details of your spouse’s filing, you must also show that one of the following is true. Your spouse:
- Failed to report income;
- Underreported income; or
- Spouse claimed deductions falsely.
In other words, your spouse must have committed some form of fraud against the IRS that you knew nothing about. And you must be able to prove that you knew nothing about it even after you signed off on the forms.
Did the Spouse Know or Make an Effort to Know About the Fraud?
Even the IRS cannot prove what a person did or did not know. However, they will reject a request for innocent spouse status if you had reason to know and simply turned a blind eye. In other words, the IRS need only show that you should have known or should have made an effort to know that your spouse was filing fraudulent tax documents.
In order to draw a conclusion on whether a spouse had “reason to know”, the IRS will look at several factors. These include:
- Type of error,
- Amount of the discrepancy,
- Financial situation of both parties,
- Whether you’re divorced or separated,
- The educational backgrounds of both parties, and
- Whether the pattern recurred over several returns.
It will be much more difficult to claim innocent spouse relief if you benefited from the understatements or omissions.
Is It Unfair to Hold You Liable for the Tax Penalties?
When you underreport or fail to report income or make spurious deductions on your taxes, the IRS can assess fines and penalties on top of charging you with tax fraud. In order to claim that you are an innocent spouse, you must blame your spouse or former spouse for the tax fraud and be able to show that it would be unfair to hold you responsible for the outstanding debt.
In this regard, the IRS will be looking for two things. First, they want to see that there is a pattern of your spouse lying to you or deceiving you. Secondly, they will attempt to assess whether or not you personally gain from the fraud. In cases where they can show that you personally gained, it becomes that much harder to show that it would be unfair to hold you liable for your spouse’s fraud.
Other Forms of Tax Relief Available to Spouses
The IRS makes innocent spouse relief difficult to prove. In the following cases, it would indeed be unfair to hold you liable for a tax debt incurred by your spouse:
- You are unhappily divorced,
- Your spouse has shown a pattern of lying to you or deceiving you,
- You gained nothing from the tax fraud,
- The one spouse is a tax attorney while the other is a stay-at-home parent,
- You can’t comprehend tax forms.
On the other hand, that’s difficult to prove and an ideal situation for qualifying for relief.
The other two are:
- Separation of liability relief, and
- Equitable relief.
Separation of liability relief allows tax debt to be divided between two spouses. The IRS will allocate the tax debt on the basis of your income or earnings. In addition, you can’t still be married and you can’t have been a member of the household for at least 12 months.
If you don’t qualify under the other conditions, then you can apply for equitable relief. Equitable relief is a generalized category in which you basically claim that it would be unfair to hold you liable for the tax debt. In this case, if the tax fraud is attributable to your spouse and it would put undue hardship on you to repay the debt, the IRS may discharge your share of the debt.
Talk to a Fairfax VA Tax Attorney About IRS Innocent Spouse Relief
Sodowsky Law Firm, P.C. offers top-quality representation to innocent spouses who are caught in the middle of a charge of tax fraud. If you are unfairly being levied with substantial debt due to the actions of your spouse, give us a call or talk to us online to set up an appointment today. We can help.