When you walked down the aisle, the wedding officiant asked you to promise that you would have and hold one another for better, for worse, for richer, for poorer, in sickness and in health, until death parts you. You can tell attorneys didn’t write these vows because death is the only loophole. If we were rewriting them, we would at least add exceptions for crime and fraud because even the IRS doesn’t force you to stay with a partner who lied on your joint tax return and may even absolve you of responsibility for his or her bad acts.
Filing a Joint Return Means More Than You May Think
Normally, if you file a joint tax return, you and the person you are filing with are bound together. You are responsible for paying their taxes, and they are responsible for paying yours. If you don’t pay up, and as a result, you are fined and charged interest, you are both jointly and severally liable. This means either one of you can be held legally responsible for the full amount owed. Even if one spouse earned all the income, both spouses are liable.
The joint and several liability parts of filing a joint return is not something most couples in happy marriages think about. They are instead focusing on the tax benefits couples can get from filing together. But when a couple splits, or it is revealed that one spouse was committing tax fraud, the joint and several liability components of the joint return become meaningful very quickly.
The Escape Valves
Thankfully, the IRS offers a few ways for innocent spouses and ex-spouses to dodge financial disaster even though they technically agreed to be held liable for their partner’s financial misdeeds when they filed a joint return.
There are three types of relief from the joint and several liabilities of a joint return:
- Innocent Spouse Relief provides you relief from the additional taxes you owe as a couple if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.
- Separation of Liability Relief provides for the separate allocation of additional taxes owed between you and your former spouse or your current spouse if you’re legally separated or not living with them. You’re then held responsible for just the amount of tax you generated.
- Equitable Relief may apply when you don’t qualify for innocent spouse relief or separation of liability relief but it would be unfair to hold you responsible for the full tax bill.
Each of these applies in different situations, and in different time frames, so talking with an experienced tax attorney can be quite helpful.
Requesting Innocent Spouse Relief
Being divorced or separated from a partner that made an error on his or her tax documents, or purposely tried to defraud the government is not enough to free you from your partner’s tax debt. In order to qualify for innocent spouse relief you must meet all of the following conditions:
- You must have filed a joint return that has an error, omission, or misstatement that’s solely attributable to your spouse.
- You must be able to establish that at the time you signed the joint return you didn’t know, and had no reason to know, that the return was incorrect.
- Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
- It is no later than two years from the first time the IRS attempted to collect the disputed tax.
These can be tricky things to prove, especially if your name was on any of the accounts or other assets that were used to hide funds. The IRS will consider all the specific facts that apply to your case in determining whether you knew or had reason to know of an understatement, including:
- The nature of the erroneous item and the amount of the erroneous item relative to other items.
- The financial situation of you and your spouse (or former spouse).
- Your educational background and business experience.
- The extent of your participation in the activity that resulted in the erroneous item.
- Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question.
- Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (for example, omitted income from an investment regularly reported on prior years’ returns).
At the Wooten Firm, we go through our client’s records with a fine tooth comb so we can answer any questions the IRS has about our client’s knowledge of their partner’s underreporting. We are at times more thorough than the IRS.
Securing a Separation of Liability
If you can’t meet all the requirements necessary to get innocent spouse relief, the next best thing is a separation of liability. A separation of liability is exactly what it sounds like — the IRS decides which partner is liable for what, and each person is only responsible for his or her part.
To qualify for separation of liability relief, you must have filed a joint return and must meet one of the following requirements at the time you request relief:
- You’re divorced or legally separated from the spouse with whom you filed the joint return
- You haven’t been a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you request relief.
- Once again, you must be able to establish that at the time you signed the joint return you didn’t know, and had no reason to know, that the return was incorrect. The same two-year time limit that applies in innocent spouse relief cases applies here.
Relying on Equitable Relief
If you don’t qualify for innocent spouse relief or separation of liability relief, you may still qualify for equitable relief. To qualify for equitable relief, you must establish that under all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax on a previously filed joint return. In many of these cases, the spouse seeking relief has been abused or was denied access to the couple’s financial information.
Unlike with innocent spouse and separation of liability relief, the IRS can grant equitable relief at any time;there is no time limit.
Tax Appeal Decision
If you have attempted to get relief from a joint tax bill and been denied, it is possible to file an appeal in tax court. Having an experienced tax attorney advocating on your behalf on appeal may make a difference if you previously tried to go it alone or relied on advice from a divorce attorney. Although these issues often arise in a divorce, divorce attorneys typically do not have the necessary expertise needed to guide someone through a complex tax dispute despite being knowledgeable about other financial aspects of divorce. Contact us today to schedule a consultation with an experienced tax attorney.