Types of Tax Liability Relief Available to Spouses

Posted By Hollingsworth & Zivitz Attorneys at Law || 18-Jul-2016

Many people believe the only way to avoid liability for your spouse’s tax liabilities is by filing Married Filing Separately. While this form is easy to accomplish, it is unfavorable due to the implications. Filing separately can result in combined tax liabilities; the denial of refundable tax credits such as the Earned Income Tax Credit, both educational credits, adoption expense credits; and other deductions and credits. Thankfully, the IRS offers two alternatives to filing separately: innocent spouse relief and injured spouse relief. Innocent spouse relief is a reactive form of relief when the actions of one spouse have resulted in an understatement of tax liability on a joint return. Injured spouse relief is a proactive form of relief, and arises when one spouse has debt which subjects to the joint tax refund to garnishment (Federal taxes, student loan debt, child support obligations, etc...). Consider the following information if you believe you should not be responsible for a tax liability resulting from your joint return:

Innocent Spouse Relief

Liability for an understatement on a joint tax return is joint and several. This means the IRS can pursue either spouse, or both, in enforcement of the tax liability. This liability remains in place even if you divorce your spouse after the joint return is filed. While the liability for the return is indefinite, the IRS does offer three types of joint liability relief which can serve to reduce or eliminate your liability for the understatement:

Innocent Spouse Relief

This relief is provided if you owe additional tax due to your spouse, or former spouse, failing to report income or claiming erroneous deductions and credits. In order to qualify for this relief, you must:

  1. Have filed a joint return with a tax deficiency that is solely attributable to your spouse’s erroneous item.
  2. Establish at the time of signing the return you did not, nor had reason to know there was an understatement of tax
  3. Show it would be unfair to hold you liable for the understatement based on all the facts and circumstances

Separation of Liability Relief

This relief is provided for an individual who is now divorced from a spouse who understated a tax liability. To qualify for this relief, you must:

  1. Be divorced or legally separated from the spouse with whom the joint return was filed
  2. Be widowed, or have not lived in the same household with the spouse at any time in the 12 month period ending on the date you request relief
  3. Not had actual knowledge of the item

Equitable Relief

This type of relief is provided to an innocent spouse who is unable to meet the requirements of the other joint liability reliefs, but considering the facts and circumstances, it would be unfair to the hold the spouse liable for the liability. This is the last resort for a spouse seeking innocent spouse relief. In order to be considered for this relief, you must:

  1. Not be eligible for the other two forms of relief
  2. Have filed a joint return for the tax year at issue
  3. Timely filed your claim for relief
  4. Have not transferred assets between you and your spouse as part of a fraudulent scheme
  5. Have not transferred assets between you and your spouse to avoid taxes or payment of taxes
  6. Have not knowingly participated in the filing of a fraudulent joint return
  7. Establish the liability which you are seeking relief from is attributable to your spouse. If the liability to partially attributable to you, you may be considered for relief for the portion attributable to your spouse.

However, meeting these qualifications does not automatically grant equitable relief. After establishing the bare qualifications, the IRS will then determine whether equitable relief is appropriate after considering a variety of factors including:

  • Marital Status
  • Economic Hardship
  • Knowledge or Reason to Know
  • Legal Obligation arising from order or contract
  • Whether a significant benefit was received due to the understatement
  • Compliance with income tax law
  • Mental or Physical Health

Generally, you have 2 years from the date in which the IRS begins collection activities, however, in the case of equitable relief, the 2 year limit does not apply. Regardless of which form of relief you pursue, you should file your form 8857 with the appropriate IRS office as soon as you become aware of any liability for which you may qualify. The Form 8857 is the only documentation needed when filing. You will have time after filing the form to provide supporting documentation to the IRS. When filing for any of these reliefs, the IRS is obligated by law to contact your spouse/ex-spouse by law, even in a spousal abuse or domestic violence situation. However, the IRS will not disclose your personal information (including name, current address, phone number, employer, etc…) to your spouse/ex-spouse.

Injured Spouse Relief

The other form of tax relief offered to spouses is injured spouse relief. As mentioned earlier, this is a proactive form of relief, as the relief can be requested as soon as the joint return is filed. Injured spouse relief is offered when a joint return is filed, and the refund is applied to pay off the obligation belonging solely to your spouse. A qualified refund could either be a return of tax payments withheld from your wages or refundable tax credits (earned income tax credit, additional child tax credit, etc…). You may file for injured spouse relief by completing a Form 8379 and filing the form with your original tax return, or as soon as you are notified of an offset of the refund. If the form is approved, the IRS will examine your refund and apply a formula to your joint refund to determine your apportioned refund.

Regardless of whether you are seeking innocent spouse relief or injured spouse relief, a qualified, experienced attorney can help maximize your chances of receiving your requested relief. For answers to additional questions about spousal relief, you can contact our Indianapolis attorneys from Hollingsworth & Zivitz Attorneys at Law. Since our firm’s establishment in 2004, we have become the go-to award-winning law firm in Indiana for people with family law disputes both simple and complex. Call 888.211.3888 to connect with our team.

Categories: Separation

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