Married couples often enjoy the little benefits attached to their union, such as filing a joint income tax return. Spouses generally file joint tax returns because there are certain credits and benefits that are available as opposed to filing separately. However, even when filing jointly, each spouse is responsible for their own taxes, interest, and penalties due on the return. The worst scenario is when one spouse is held responsible for the entire amount due even if the other spouse made all the income last year.
Hypothetically speaking, let’s say your spouse or ex-spouse failed to properly file the joint return or deliberately committed tax fraud, you could still be held responsible for the penalties even without your knowledge or understanding of the situation. This is where Innocent Spouse Relief comes to the rescue…
Unfortunately, Innocent Spouse Relief has caused more of a burden than a relief in the past few years. It is very hard to prove your case with the IRS and as a result, many are denied this opportunity. However, last year the IRS eliminated the two-year statute of limitations on filing for equitable relief (category open to taxpayers who do not meet requirements of the Innocent Spouse Law). The IRS’s change of policy occurred because they acknowledged many spouses are unaware of the transgression until after the fact. If the spouse is in an abusive relationship, much of the financial information may be concealed to one spouse.
There are three categories of Innocent Spouse Relief:
1) Innocent Spouse Relief – relieves spouse or ex-spouse of all liabilities incurred on the tax return. The spouse must prove the other spouse’s transgressions by giving a detailed account why he/she did not know the details of the return.
2) Separation of Liability – the IRS will allow the victimized spouse to pay the portion of taxes owed then goes after the guilty spouse for the understated tax, interest and penalties.
3) Equitable relief – if the spouse cannot prove eligibility for the previous two categories, the IRS will give more leeway for those who simply didn’t know their spouse failed in filing their income tax return.
In order to apply for Innocent Spouse Relief, you must file Form 8857 which will work for multiple years’ filings. When the IRS makes the decision on whether you are eligible, some factors they take in consideration are your educational and business experiences, your financial situation, and the extent of your participation in the unlawful tax return.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.