On htj.tax we have videos where we interview thought leaders like Margaret Rose.  Today we will be talking about Innocent Spouse Relief.

Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows them. When filing jointly, both taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise from the joint return even if they later divorce. Joint and several liability means that each taxpayer is legally responsible for the entire liability. Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits. This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. In some cases, however, a spouse can get relief from being jointly and severally liable.

Types of Relief

There are three types of relief from the joint and several liability of a joint return:

1. Innocent Spouse Relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.
2. Separation of Liability Relief provides for the separate allocation of additional tax owed between you and your former spouse or your current spouse you’re legally separated from or not living with, when an item wasn’t reported properly on a joint return. You’re then responsible for the amount of tax allocated to you. Refunds aren’t available under separation of liability relief.
3. Equitable Relief may apply when you don’t qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to your spouse. You may also qualify for equitable relief if the amount of tax reported is correct on your joint return but the tax wasn’t paid with the return.

Note: You must request innocent spouse relief or separation of liability relief no later than 2 years after the date the IRS first attempted to collect the tax from you. For equitable relief, you must request relief during the period of time the IRS can collect the tax from you. If you’re looking for a refund of tax you paid, then you must request it within the statutory period for seeking a refund, which is generally three years after the date the return is filed or two years following the payment of the tax, whichever is later. See Publication 971, Innocent Spouse Relief for additional restrictions on refunds available under innocent spouse relief, equitable relief, and relief based on community property laws.

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse (or former spouse). Innocent spouse relief only applies to individual income or self-employment taxes. For example, Household Employment taxes, Individual Shared Responsibility payments, and business taxes and trust fund recovery penalty for employment taxes are not eligible for innocent spouse relief.

The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount. But if you wish, you can figure it yourself. See How To Allocate the Understatement of Tax, within Publication 971.

You must meet all of the following conditions to qualify for innocent spouse relief.

• You filed a joint return which has an understatement of tax due to erroneous items, defined below, of your spouse (or former spouse).
• You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax. See Actual Knowledge or Reason to Know, defined below.
• Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. See Indications of Unfairness for Innocent Spouse Relief, below.
• You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

Erroneous Items

Erroneous items are either of the following.

• Unreported income. This is any gross income item received by your spouse (or former spouse) that is not reported.
• Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse).

The following are examples of erroneous items.

• The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040 or 1040-SR, but never paid for any advertising.
• The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.
• No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family’s two dogs.

Actual Knowledge or Reason To Know

You knew or had reason to know of an understatement if:

• You actually knew of the understatement, or
• A reasonable person in similar circumstances would have known of the understatement.

Actual Knowledge

If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement. For information about the criteria for determining whether you actually knew about an erroneous item, refer to Relief from Separation of Liability for more information about Actual Knowledge.

Reason to Know

If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement.

The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement of tax due to an erroneous item. The facts and circumstances include:

• 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).

Partial Relief When Portion of Erroneous Item is Unknown

You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. You will be relieved of the understatement due to that portion of the item if all other requirements are met for that portion.

Example

If at the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. The IRS examined your tax return several months after you filed it and determined that your spouse’s unreported gambling winnings were actually $25,000. You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. The understatement of tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. The understatement of tax due to the $5,000 of gambling winnings will not qualify for relief.

Indications of Unfairness for Innocent Spouse Relief

The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understatement.

The following are examples of factors the IRS will consider.

• Whether you received a significant benefit (defined next), either directly or indirectly, from the understatement.
• Whether your spouse (or former spouse) deserted you.
• Whether you and your spouse have been divorced or separated.
• Whether you received a benefit on the return from the understatement.

Refer to Factors for Determining Whether to Grant Equitable Relief on the Equitable Relief page for other factors.

Significant Benefit

A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances. Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understatement.

Example

You receive money from your spouse that is beyond normal support. The money can be traced to your spouse’s lottery winnings that were not reported on your joint return. You will be considered to have received a significant benefit from that income. This is true even if your spouse gives you the money several years after he or she received it.

Separation of Liability Relief

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’re widowed, or
• 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

You must also not have had actual knowledge of the item that gave rise to the deficiency at the time you signed the joint return, unless you can show that you signed the return under duress.

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 deficiency or underpayment of tax. In addition, you must meet the other requirements listed in Publication 971, Innocent Spouse Relief. See Revenue Procedure 2013-34 for additional information about qualifying for equitable relief, including how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted.

Form to File

To seek innocent spouse relief, separation of liability relief, or equitable relief, you should submit to the IRS a completed Form 8857, Request for Innocent Spouse Relief or a written statement containing the same information required on Form 8857, which you sign under penalties of perjury. You may also refer to Publication 971, Innocent Spouse Relief for more information. If you request relief from the joint and several liability of a joint return, the IRS is required to notify the spouse you filed jointly with of your request and allow him or her to provide information for consideration regarding your claim.

Community Property States

If you lived in a community property state and didn’t file as married filing jointly, you might qualify for relief from the operation of state community property law. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Refer to Publication 971 for more details.

Injured Spouse vs. Innocent Spouse

An injured spouse claim is for allocation of a refund of a joint refund while an innocent spouse claim is for relief or allocation of a joint and several liability reflected on a joint return. You’re an injured spouse if all or part of your share of a refund from a joint return was or will be applied against the separate past-due federal tax, state tax, child or spousal support, or federal non-tax debt (such as a student loan) owed by your spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund. For more information, refer to Topic No. 203, About Form 8379, Injured Spouse Allocation and Can I or My Spouse Claim Part of a Refund Being Applied Toward a Debt Owed by the Other Spouse?

Innocent Spouse Questions & Answers

1. How do I request relief?

File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. You need not file multiple forms. One form can cover multiple years.

2. Should I include a letter when filing Form 8857?

You may include a letter and any other information you would like IRS to consider.

3. When should I file Form 8857?

You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held. The following are some of the ways you may become aware of such a liability.

• The IRS is examining your tax return and proposing to increase your tax liability.
• The IRS sends you a notice.

However, you generally must file Form 8857 no later than 2 years after the first IRS attempt to collect the tax from you that occurs after July 22, 1998. (But see the exceptions below for different filing deadlines that apply). For this reason, do not delay filing because you do not have the required documentation. See the answer to question 35, “What constitutes a collection activity for purposes of starting the two-year statute of limitations that cover the filing of Form 8857?” below.

Exception for equitable relief.

On July 25, 2011, the IRS issued Notice 2011-70 expanding the amount of time to request equitable relief. The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both:

• Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. In certain cases, the 10-year period is suspended.
• Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. See Pub. 556, for details.
• Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability.

Exception for relief based on community property laws.

If you are requesting relief based on community property laws, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse or former spouse for the tax year for which you are requesting relief. However, if the IRS begins an examination of your return during the 6-month period the latest time for requesting relief is 30 days after the date of the IRS’ initial contact letter to you. The period of limitations on assessment is the amount of time, generally 3 years, that the IRS has from the date you filed the return to assess taxes that you owe. If you do not qualify for the relief described above and are now liable for an unpaid or understated tax you believe you should be paid only by your spouse or former spouse, you may request equitable relief. See the Exception for equitable relief above.

4. Where should I file my Innocent Spouse claim?

If using the U.S. Postal Service, please mail the Form 8857, Request for Innocent Spouse Relief, to:

Internal Revenue Service
P.O. Box 120053
Covington, KY 41012

OR

If using a private delivery service, please mail the Form 8857, Request for Innocent Spouse Relief, to:

Internal Revenue Service
7940 Kentucky Drive, Stop 840F
Florence, KY 41042

OR

You may fax the Form 8857 and attachments to the IRS at 855-233-8558.

Please write your name and social security number on any attachments

Note: Please do not file the Form 8857 with your tax return or Tax Court.

5. Is there a toll free number to call if I have questions regarding an Innocent Spouse Claim or how to complete the Form 8857 Request for Innocent Spouse Relief?

If you need additional information on your Innocent Spouse Claim or on the Form 8857, Request for Innocent Spouse Relief, the toll free number is 1-855-851-2009.

6. What type of documents do I need to submit with the Form 8857, Request for Innocent Spouse Relief?

You should carefully review the Form 8857, Request for Innocent Spouse Relief, and it will guide you on what documents to submit. For comprehensive information on Innocent Spouse, Publication 971, Innocent Spouse Relief, explains each type of relief, who may qualify, and how to request relief.

7. I want to file, but I am afraid of what my ex-spouse will do, should I still file?

By law, the IRS must contact your spouse or former spouse. There are no exceptions, even for victims of spousal abuse or domestic violence. Therefore, you should consider all options including an Offer-in-Compromise Doubt as to Liability.

We will inform your spouse or former spouse that your filed Form 8857 and will allow him or her to participate in the process. We must also inform him or her of its preliminary and final determinations regarding your request for relief.

However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability.

Caution: If you petition the Tax Court your spouse or former spouse may see your personal information.

8. How long will the process take?

When a Form 8857, Request for Innocent Spouse Relief, is filed with the IRS, it may take up to 6 months before a determination is made. During the processing time, the Service is requesting your tax information and contacting the non-requesting spouse. By law, the IRS must contact your spouse or former spouse. There are no exceptions, even for victims of spousal abuse or domestic violence.

9. Should I wait to file my current year tax return pending the outcome of my claim?

No, you should file your current return and we will not hold any refund you are due.

10. I filed a joint tax return with my spouse and the entire refund was applied to my spouse’s back child support. Should I file a Form 8857, Request for Innocent Spouse Relief, to receive my portion of the refund?

This issue is generally not related to Innocent Spouse Relief. You may be eligible for injured spouse provisions, if you file a joint tax return and all or part of your portion of the overpayment was applied or offset to your spouse’s legally enforceable past-due federal tax, state income tax, child or spousal support, or a federal nontax debt such as a student loan. You should review the information on Injured Spouse and Form 8379 Injured Spouse Allocation.

11. I received an Automated Underreporter Notice or CP 2000 Notice and the unreported income belongs to my former spouse. What should I do?

If you filed a joint tax return, you are jointly and individually responsible for the tax and any interest and penalty due on the joint return. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on a previously filed joint return.

In some cases, a spouse may be relieved of the tax, interest, and penalties on a joint tax return. You can ask for relief no matter how small the liability.

Three types of relief are available:

• Innocent Spouse Relief
• Separation of Liability
• Equitable Relief

You must file Form 8857, Request for Innocent Spouse Relief, to request any of the methods of relief. Publication 971, Innocent Spouse Relief, explains each type of relief, who may qualify, and how to request relief.

12. My Innocent Spouse Claim was previously denied and I now have new additional information, can I file a claim again?

Yes, you can file a second claim, provide the new additional information and it will be reconsidered. However, you will not have tax court rights on this reconsideration.

13. What is the effective date of the new innocent spouse rules under Internal Revenue Code 6015?

Internal Revenue Code 6015 innocent spouse rules are effective for:

• Unpaid balances as of July 22, 1998; and
• Liabilities arising after July 22, 1998

14. What is joint and several liability?

Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.

15. How can I get relief from joint and several liability?

Relief now falls into three categories: Innocent Spouse Relief; Separation of Liability; and Equitable Relief. Each of these kinds of relief has different requirements. They are explained separately below.

16. Can both spouses request relief?

Yes, each spouse can file a Form 8857 to request relief from liability from tax, interest and penalties.

17. Does the non-requesting spouse have any appeal rights?

Per Rev. Proc. 2003-19, the non-requesting spouse has the right to appeal the preliminary determination to grant partial or full relief to the requesting spouse when the preliminary determination letter is issued April 1, 2003 or later. However, the non-requesting spouse may not petition the Tax Court from the final determination letter. If relief is denied in part or in full, and the requesting spouse petitions the U.S. Tax Court, the non-requesting spouse, by law, will be given the opportunity to become a party in that proceeding.

For claims where a preliminary determination was issued prior to April 1, 2003, the non-requesting spouse had no appeal rights when the preliminary determination letter granted relief in part or in full to the requesting spouse. If relief was denied and the requesting spouse petitioned the U.S. Tax Court, the non-requesting spouse, by law, was given the opportunity to be a party in that proceeding.

18. Will the other spouse be notified that I filed a claim for innocent spouse relief?

The IRS is required to notify the non-requesting spouse to allow them to participate. They will also be notified of the determination on your election and have the opportunity to appeal IRS’s preliminary determination to grant you full or partial relief.

19. What are the rules for Innocent Spouse Relief?

To qualify for innocent spouse relief, you must meet all of the following conditions:

• You must have filed a joint return which has an understatement of tax;
• The understatement of tax must be due to erroneous items of your spouse;
• You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax;
• Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and
• You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998

20. What are erroneous items?

Erroneous items are any deductions, credits, or bases incorrectly stated on the return, and any income not reported on the return.

21. What is an understatement of tax?

An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return. For example, you reported total tax on your 2009 return of $2,500. IRS determined in an audit of your 2009 return that the total tax should be $3,000. You have a $500 understatement of tax.

22. Will I qualify for innocent spouse relief in any situation where there is an understatement of tax?

No. There are many situations in which you may owe tax that is related to your spouse, but not be eligible for innocent spouse relief. For example, you and your spouse file a joint return that reports $10,000 of income and deductions, but you knew or had reason to know that your spouse was not reporting $5,000 of dividends. You are not eligible for innocent spouse relief when you have knowledge or reason to know of the understatement.

23. What are the rules for Separation of Liability?

Under this type of relief, you divide (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse. The understatement of tax allocated to you is generally the amount of income and deductions attributable to your earnings and assets. To qualify for separate liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857:

• You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
• You were not 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 file Form 8857.

24. Why would a request for separate liability be denied?

Even if you meet the requirements listed above, a request for separate liability will not be granted in the following situations:

• The IRS proves that you and your spouse transferred assets for the main purpose of avoiding payment of tax.
• The IRS proves that at the time you signed your joint return, you had actual knowledge that any items giving rise to the deficiency and allocable to your spouse were incorrect.

25. If a husband and wife are still married but separated for 12 months, prior to filing a claim for relief due to an involuntary reason such as incarceration or military duty, can separation of liability relief be granted?

Separation of liability applies to taxpayers who are (1) no longer married,  (2) legally separated, or (3) living apart for the 12 months prior to the filing of a claim. Under this rule, you are no longer married if you are widowed.

Living apart does not include a spouse who is temporarily absent from the household. A temporary absence exists if it is reasonable to assume that the absent spouse will return to the household, or a substantially equivalent household is maintained in anticipation of such a return. A temporary absence may include absence due to incarceration, illness, business, vacation, military service, or education.

A claim can be filed if any of the three statutory requirements are met.

26. What are the rules for Equitable Relief?

Equitable relief is only available if you meet all of the following conditions:

• You do not qualify for innocent spouse relief or the separation of liability election.
• The IRS determines that it is unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances.

Note: Unlike innocent spouse relief or separation of liability, if you qualify for equitable relief, you can get relief from an understatement of tax or an underpayment of tax. (An underpayment of tax is an amount properly shown on the return, but not paid.)

27. What factors are considered in determining whether or not to grant equitable relief?

The following factors may be considered, but the list is not all-inclusive:

• Current marital status
• Reasonable belief of the requesting spouse, at the time he or she signed the return, that the tax was going to be paid; or in the case of an understatement, whether the requesting spouse had knowledge or reason to know of the understatement
• Current financial hardship/inability to pay basic living expenses
• Spouses’ legal obligation to pay the tax liability pursuant to a divorce decree or agreement to pay the liability
• To whom the liability is attributable