Innocent spouse relief from problematic tax returns filed with IRS

Federal tax law provides relief to certain spouses who innocently signed joint returns not knowing of their spouses’ underreporting or erroneous entries.

When a married couple files a joint federal tax return, they are jointly and severally liable for any taxes owed on the return as well as additional tax the IRS may later assess, plus any interest or penalty that may be added. Joint and several liability means that the debt is not split 50-50 between the two spouses, but rather each is individually liable for the entire amount owed, no matter who earned the taxable income.

This joint and several liability survives even if the couple divorces or separates or if one of them dies.

In most marriages, joint and several liability works out fine. But problems arise when one spouse, unbeknownst to the other, underreported income or took an improper credit or deduction that resulted in additional tax, interest and penalty being added to the amount owed on the return. The spouse who signed without knowledge of the improper filing behavior is still legally liable for the entire amount due. The IRS may try to collect the funds from either spouse, including keeping future tax refunds.

Incredibly, even if one spouse agrees to accept all tax liability generated by a joint return in a negotiated divorce settlement that becomes part of a court-ordered divorce decree, the joint and several liability is not extinguished and the IRS can still pursue collection efforts against both spouses.

In such a situation, the IRS has established three kinds of relief. The first is titled innocent spouse relief that is available when understated income or improper deductions or credits are entirely attributable to one spouse. The other spouse must have had no knowledge or reason to know of the wrongly reported information at the time of signing the return. The IRS must feel that it would be unfair under the circumstances to hold the innocent spouse liable.

The second type of relief is separation of liability in which the innocent spouse again must have had no knowledge of the understated tax liability at the time of signing. The couple must have divorced, be legally separated, lived apart for the past year or the spouse at fault must have died. The IRS will split the liability between the two spouses, effectively destroying joint and several liability for the tax bill.

If an innocent spouse is not eligible for either of the first two kinds of relief, he or she may be able to get equitable relief if the IRS finds under the circumstances to hold the spouse liable would be unfair.

This is only an introduction to a detailed, complex area of tax law. To understand whether one of these innocent spouse programs could apply to your situation, seek the advice of an experienced tax lawyer.

The Atlanta attorneys at The Gartzman Law Firm, P.C., represent taxpayers seeking innocent spouse relief and in a wide array of tax-related matters.