Let me set the stage: A man and woman meet in high school and are married soon after graduation. Wife works a few part time jobs before becoming a stay-at-home mom. Husband continues to work in construction as an Independent Contractor for the next several years while Wife raises their 3 children. Husband was responsible for all financial affairs on behalf of the family. Wife is given a monthly allowance and runs any large purchases by Husband first. She has no idea how much money Husband makes, how much money they have in the bank, etc. Many years down the road, Husband decides to divorce Wife and leaves her with nothing. Just as she feels she's built up a new life on her own- got a job, opened her own bank account, rented her own apartment, etc- BAM! The IRS begins garnishing her wages for a tax debt incurred during her marriage because Husband was not filing and paying in taxes throughout the years.
We see this all the time here at Bryson Law Firm, LLC in one form or another. Hearing the stories of a marriage gone bad is never pleasant, but it's even harder to have to be the one to explain that because a joint tax return was filed in the years Husband and Wife were married, both taxpayers are jointly and individually responsible for the tax, penalties, and interest of a joint return. The IRS has the right to hold Wife responsible for all the tax due, even if the income was earned by the other spouse.
When these situations arise, there is hope that Wife isn't stuck with a wage garnishment until the debt is paid. Sure, she could make payment arrangements, try for an Offer in Compromise, etc. in place of the wage garnishment, but the best option may be one of the 3 types of relief offered to Innocent Spouses- Innocent Spouse Relief, Separation of Liability, or Equitable Relief.
Here's what the IRS has to say about Innocent Spouse:
“Unfortunately, in marriage and life, everything is not always "Happily Ever After". If that is the case, what can you do?
- If you filed a joint return or a married filing separate return while living in a community property state [NOTE HERE: Louisiana IS!] and your situation is not "Happily Ever After"; the IRS wants to help!
- Many married taxpayers file a joint tax return because of certain benefits this filing status allows. If you did so, you may be held responsible for monies due, even if your spouse earned all of the income - And this is true even if a divorce decree states that your spouse will be responsible for any amounts due on previously filed joint returns.
- In order to qualify for Spousal Relief, you must meet certain conditions. Please continue if you are interested in exploring whether you might qualify for relief.”
Now let’s discuss the factors in determining who can receive this type of IRS relief.
Innocent Spouse
This relieves the spouse from the responsibility of paying tax, interest, and penalties
You must have:
- Filed a joint return with an underestimate of tax due to erroneous items (unreported income, incorrect deductions)
- Establish that at the time you signed the joint return, you did not know/had no reason to know that there was an understatement of tax (actual knowledge OR a reasonable person should have known of the understatement)
- For “reason to know”, the IRS considers several facts and circumstances such as the nature of the erroneous item and the amount relative to other items, the financial situation of you and your spouse, your educational background/business experience, the extent of participation in the activity that resulted in the erroneous item, whether you failed to ask about items on the return that a reasonable person would ask, whether the erroneous item represented a departure from a recurring pattern on prior year returns, etc.
- Taking into account all facts and circumstances, it would be unfair to hold you liable for the understatement of tax
- NO relief will be granted if the IRS proves that you and your spouse transferred property to one another as part of a fraudulent scheme
- Here, the IRS considers several factors such as whether you received a significant benefit from the understatement, whether you were deserted by your spouse, if you are divorced/separated, whether you received a benefit on the return from an understatement, etc.
Separation of Liability
Separation of Liability allocates any understatements of tax on a joint return between the spouses
You must have:
- Filed a joint tax return
- EITHER are no longer married to/separated from the spouse OR were not a member of the same household as the spouse for the 12 months prior to filing the claim for Separation of liability
- Must be a separate dwelling AND are estranged (not just temporarily absent from the household)
Even if all of the above are met, the IRS can deny the request for relief when they prove that spouses transferred assets to one another as part of a fraudulent scheme, that at the time the joint return was signed, you had actual knowledge of the erroneous items, or your spouse transferred property to you to avoid tax or payment of tax
- Actual knowledge is determined by several factors such as whether you made a deliberate effort to avoid learning about the item to be shielded from liability or whether you and your spouse jointly owned the property that resulted in the erroneous item
- There is an EXCEPTION to the no actual knowledge requirement IF you were the victim of domestic abuse and because of that abuse, you did not challenge the items on your return because you were afraid your spouse would retaliate against you. Also, if you can show you signed your joint return under duress, then it is not a joint return and you are not liable for any tax shown on that return
Equitable Relief
This is the most common form of relief we request; the big departure from the above requirements is that you can request Equitable Relief on an underpayment of tax
Requirements for Equitable Relief:
- You are not eligible for Innocent Spouse or Separation of Liability relief
- You and spouse did not transfer assets to each other as part of a fraudulent scheme or to avoid tax or the payment of tax
- You did not file or fail to file your return with the intent to commit fraud
- You did not pay the tax
- You can establish that in light of all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax
- Such facts and circumstances include separation, whether you would suffer severe economic hardship if relief is not granted, whether your former spouse has a legal obligation under a divorce decree or agreement to pay the tax, whether you received a significant benefit from the unpaid tax, whether you have made a good faith effort to comply with federal income tax laws, and whether you knew or had reason to know about the items causing the understatement or that tax would not be paid
- The tax liability must be attributable to an item of the spouse with whom you filed the joint return UNLESS:
- The item is attributable to you solely because of community property law
- You did not know or had no reason to know that funds intended for the payment of tax were misappropriated by your spouse for his/her benefit
- You establish you were the victim of abuse before signing the return and as a result of the abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation
- You establish that your spouse’s fraud is the reason for the erroneous item causing the understatement of tax
The form to fill out to request Innocent Spouse relief from the IRS is Form 8857. As always, if you have any questions or want an attorney to assist you in filing for Innocent Spouse relief, call us!
