If you’re married and file jointly, the IRS affords you certain benefits. For instance, your spouse can be a tax shelter, can contribute to an investment retirement account, and help you avoid estate taxes when you die.
Married couples filing jointly, however, should keep in mind that both members of this partnership are legally responsible for any tax, interest, or penalties due on the joint return, even if they split up. In fact, one spouse may have to pay all taxes due, even if the other spouse earned the income. But you don’t have to give up on marriage just yet. The IRS in some cases relieves an “innocent spouse” of tax, interest, and penalties incurred on a joint tax return.
Innocent-spouse relief may allow a person to forgo paying their spouse’s tax if it was reported incorrectly. Innocent spouses must be able to prove that they didn’t incur the tax and did not benefit from failure to pay it. The idea is to protect one spouse from taxes due as a result of fraud or accounting shenanigans enacted by the other spouse. This relief also protects a spouse from a divorce in which the ex fails to pay taxes on income and tries to stick the other spouse with the bill.
To meet the innocent-spouse rule, you must document that your spouse (not you) committed the error or fraud and that you didn’t know about the fraudulent activity. The application for relief also must be filed within two years of when the IRS first begins to collect taxes owed.
Separation of Liability Relief
If you understate taxes due, separation of liability relief divides the taxes due between you and your spouse, generally requiring you to pay only the amount of taxes for which you are responsible. To qualify for this relief, you must have filed taxes jointly, no longer be married to or be legally separated from your spouse, and not have been living with your spouse for 12 month before the date at which you file for relief.
If you don’t qualify for innocent-spouse relief or relief by separation of liability, you may be eligible for equitable relief from the underpayment of taxes or the understatement of taxes. To qualify for equitable relief, you must meet some of the following conditions:
You are not eligible for other types of spousal tax relief.
You and your spouse or ex-spouse didn’t try to defraud the government by transferring assets to each other.
You can establish that it would unfair to hold you liable for understated or underpaid taxes.
You didn’t know that the money intended to pay your taxes was misappropriated by your spouse for his or her benefit.
To learn more about innocent-spouse, separation of liability, or equitable relief, give us a call today.