The IRS says it knows all too well that “in marriage and life everything is not always ‘happily ever after,’ ” so the agency is taking additional steps to provide relief to an injured spouse, a husband or wife unfairly penalized for errors on a joint tax return.
“The IRS is significantly changing the way we determine innocent spouse relief,” Doug Shulman, commissioner of the Internal Revenue Service, said in a prepared statement. “The improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”
The improvements are the second major change the IRS has made to its innocent spouse program in the last eight months. In July, the IRS eliminated a two-year time limit for applying for relief. Most recently, the IRS will streamline the process for determining whether a spouse is eligible for relief and will take into consideration whether a spouse was a victim of abuse, had no financial control in a relationship and is suffering financial hardship.
When a married couple files a joint return, both husband and wife are responsible for the tax and any penalties and interest due, even if the couple later divorces. The IRS make an exception to this rule for an injured or innocent spouse, one who was unaware of omissions or errors on a joint tax return.
How does a taxpayer qualify for innocent spouse relief? The IRS considers, among other things, whether a spouse knew or had reason to know the joint return contained errors. The agency also evaluates whether it would be unfair to hold a husband or wife liable for a spouse’s errors.
An erroneous statement can include unreported income or an improper tax deduction or credit, according to the IRS. For example, a spouse claims a business fee deduction of $10,000, but uses the money to pay state fines, which are not deductible. Or, a spouse claims $4,000 for security costs related to a home office, but the costs actually covered food and vet bills for the family’s two dogs.
A spouse who actually knew or had reason to know about reporting irregularities does not generally qualify for injured spouse relief and remains jointly liable for the errors. To determine whether a spouse had reason to know, the IRS will consider, among other things, your educational background and business experience, how involved you were in the activity related to the error, and whether you failed to question an error that would have caught the attention of a reasonable person. As an example, said the IRS, a wife may qualify for injured spouse relief if her husband failed to report gambling winnings and the wife did not know about, and had no reason to know about the windfall.
The IRS uses a number of criteria to evaluate the fairness of joint liability, including whether a spouse has been deserted or divorced, and whether he or she benefitted significantly from the reporting errors. A significant benefit might be receiving money traced to a spouse’s unreported lottery winnings.
The IRS recommends filing the for innocent spouse relief as soon as becoming aware of an unfair tax liability. Injured spouses seeking tax relief can file IRS Form 8857.
