Love trumps everything, right? Until your spouse cheats the IRS and you get a tax bill for it. Then things change. Fast. A tax relief method you can use in this case is the innocent spouse relief. Here’s how it works.
Pros and cons of filing jointly
The IRS strongly encourages couples to file taxes jointly by offering generous tax deductions. For instance, couples who file jointly have more chances to qualify and receive larger amounts for the Earned Income Tax Credit, the Child and Dependent Care Tax Credit, and adoption expenses, to mention a few. Couples who file separately receive fewer tax benefits. In most cases, filing jointly makes financial sense.
The thing with filing jointly is that both spouses are equally responsible for the entire tax debt. This applies even if the couple later divorces and the divorce decree specifically states one of the spouses is responsible for all tax debts. There are some exceptions, which is where innocent spouse relief comes in.
What is innocent spouse relief?
Innocent tax relief is one of three tax relief methods available to spouses who filed jointly and want to avoid an unfair tax liability. The other two are separation of liability relief and equitable relief.
If the IRS accepts your innocent spouse relief, the IRS will remove the tax liability caused by mistakes made by your spouse. Mind you, you’re still on the hook for any legitimate taxes.
The IRS defines mistakes (erroneous items in IRS jargon) as unreported income and improper deductions, credit, or property basis. For example, your husband claimed a $20,000 deduction for a business expense he never made. Or maybe your wife claimed a $2,000 deduction for paying speeding tickets.
Who qualifies for innocent spouse relief?
To qualify for innocent spouse relief, you must meet these four conditions:
- You and your spouse filed a joint tax return.
- Your spouse or ex made “mistakes” that caused you to understate the tax liability on your joint tax return.
- You can prove you didn’t know or had no reason to know about it.
- The IRS determines it would be unfair to make you liable for the tax understatement.
What if I didn’t prepare or sign the joint tax return?
It all depends on whether you consented or knew your spouse was signing the return for you. The IRS’ bar for consent is low. A pattern of filing joint returns and not filing an individual tax return could be enough for the IRS to consider you gave tacit consent, even if your spouse “forged” your signature on the returns. Other signs of tacit consent include giving your spouse tax information, such as W-2 forms and 1099s, and not objecting to the filing of the tax return. (Source)
If you can prove your signature was forged without your consent, you can request the IRS cancel the joint return so you are only liable for your individual tax liability not your spouse’s mistakes. (Source)
How long do you have to file for innocent spouse relief?
If you’re filing for innocent spouse relief, you have two years after the IRS first attempted to collect the tax from you to file your claim. However, taxpayers filing for equitable relief (Source), a similar form of tax relief also available to spouses, can apply as long as the statute of limitations hasn’t expired on the tax return in question (Source).
How to file for innocent spouse relief
The first step is to complete Form 8857 Request for Innocent Spouse Relief. You can use one form to claim for multiple years.
The form asks for personal and financial information from you and your spouse. If you’re separated, divorced, or your spouse died, you will need to provide dates and paperwork to back your claims.
Part three of the form asks whether you were involved in making financial decisions and preparing the tax return. The IRS is also interested in large purchases you made as a couple for the years you want relief. It may be hard to prove you didn’t know something was fishy if you were signing tax returns where your spouse was claiming a business loss but you were, for example, taking extravagant vacations or making large purchases.
You may also attach a letter to the form with any information or evidence you feel would support your claim.
Where should I file Form 8857 Innocent Spouse Relief?
There are three ways to file your Innocent Spouse Relief depending on whether you’re sending it by regular U.S. Postal Service, private delivery, or fax.
Notice that the IRS will contact the spouse or ex-spouse you consider responsible. This gives the other spouse a chance to be part of the process and appeal any decisions made by the IRS. The IRS is required by law to do this even in cases of domestic abuse. There are no exceptions.
Innocent spouse relief and the statute of limitations
Tax law limits the time the IRS gets to collect taxes. Typically, it’s 10 years. Once the statute of limitations expires on a tax liability, the IRS can no longer collect it. it times out. However, there are certain actions that can extend this period, including filing for innocent spouse relief. If you file, the IRS’ collection period is suspended until 90 days after the tax court petition gets filed. (Source)
The trade off is that the IRS also puts its collection efforts on hold while it considers your application. Before you file, make sure your chances of success justify extending the IRS’ collection time frame.
Another issue to consider when filing any type of tax relief application is whether there are any issues with your tax returns that the IRS may have missed. The IRS could audit any tax return you mention in an innocent spouse relief application.
To be safe, consider talking to a tax attorney or hiring a tax relief firm that has tax attorneys on staff, such as Optima Tax Relief, before you apply. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Having a tax professional look over your account may reveal other tax relief options you hadn’t considered.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.