The Innocent Spouse
When married couples file joint tax returns, they are then jointly responsible for paying any resulting bill, even if they divorce and the divorce court orders only one of the parties to pay the tax. No, the IRS doesn’t really care, what the decree states.
If that party does not pay, the spouse is equally liable and will be contacted by the IRS. However, the law allows for relief from the joint liability based on an innocent spouse theory in three different ways:
Innocent Spouse relief
The most common method which requires that a number of provisions are met. Specifically,
- The joint return must contain an understatement of the tax owed
- The understatement must be the other spouse\’s fault.
- The petitioning taxpayer did not or could not have known about the understatement when the return was signed.
- It would be unfair to hold the taxpayer liable for the misbehavior of the spousal partner and
- The request for innocent spouse relief must be brought within two years after the date on which the IRS first began collection activity.
Separation of Liability
This method allows for a division of the understated portion of the tax based on the amount of income and deductions that are attributable to the taxpayer’s own earnings and assets under two conditions.
- The taxpayer and spouse must be unmarried or legally separated and
- The taxpayer was not a member of the household for the previous 12 month period.
However, if the taxpayer and spouse transferred assets to avoid paying tax or the taxpayer knew of the deficiency at the time the return was signed, relief on this basis will be denied.
- Equitable Relief This category is available only if the taxpayer does not qualify for innocent spouse or separation of liability and the IRS determines that it would be simply unfair to hold the taxpayer liable. Common factors that cause this determination are abuse during marriage, current marriage status, reasonable belief that the tax bill would be paid, no knowledge of the understatement, if the other spouse is obligated to pay due to a divorce decree or any other agreement, etc.
The Injured Spouse
The IRS can seize any refund due on a joint return and use it to pay certain past due bills owed by just one of the spouses. Refunds may be used to pay unpaid state or federal tax bills from previous years or past due child or spousal support and other types of debt.
However, if the debt belongs to only one of the spouses, the other may claim to be injured under the law and in doing so becomes entitled to his or her fair share of the refund. This situation can be avoided by filing separately, but the financial advantage of filing a joint tax return is then lost.
In order to claim a portion of the refund as exempt from the payment of federal and other debts, you must file the Injured Spouse Request IRS Form 8379 with your joint return requesting a portion of the refund be sent to the non-owing spouse.
Certain requirements must be met to make such a claim.
- The taxpayer requesting the refund must not be legally obligated to pay the past due amount
- The taxpayer must actually have wages on the joint return
- The taxpayer must have made and reported payments during the year or claim the earned income credit or other refundable credit.
This form can also be filed to claim part of a refund that has already been seized.
If you are facing a serious tax debt that you think may be remedied via the use of an innocent spouse claim or have lost your portion of a tax refund because of someone else’s debt, you can contact our AZ tax office to discuss your options.