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An introduction to innocent spouse relief before the IRS

The IRS has three relief programs for spouses who sign joint returns not knowing of spousal underreporting.

Spouses sign joint returns all the time without any inkling that anything might be wrong with the content of their returns. Unfortunately, unsuspecting spouses can later suffer financially because their better halves underreported income or took improper deductions or credits that resulted in increased tax liability, plus interest and penalties.

When a spouse signs a joint return, he or she is jointly and severally liable for any resulting tax liability, including potential interest and penalties. This means that the tax debt is not split down the middle, but rather each spouse is completely liable for the entire amount due as an individual. The IRS can collect the entire amount from either spouse, including keeping tax refunds that would otherwise be due back.

Notably, even if the joint tax liability is completely assigned to the at-fault spouse in a divorce settlement agreement that becomes part of a court order, the joint and several liability is not extinguished and the innocent spouse is still legally responsible for the entire tax liability.

Luckily for those spouses who find themselves in such situations, the IRS provides three kinds of relief in these kinds of situations:

  • Innocent spouse relief may be available if the unsuspecting spouse can show that he or she did not know and had no reason to know of the tax deficiency when the return was signed.
  • Separation of liability relief allows the IRS to divide the tax liability between the spouses if the innocent spouse did not and had no reason to know of the improper reporting and the couple has divorced, legally separated or lived apart for a year, or the innocent spouse has become widowed.
  • Equitable relief may be available if the innocent spouse is not eligible for either of the other two programs and fairness supports granting reprieve from liability.

One difficulty with these relief programs is that the at-fault spouse must be notified of the request for relief filed with the IRS by the innocent spouse, which can be problematic in situations of domestic abuse.

This is only a broad introduction to these complicated topics. Questions can be answered by knowledgeable tax counsel. Any spouse who is facing tax liability because of underreporting by his or her spouse on a joint return should seek legal advice as soon as possible so as not to miss any deadlines for requesting potential relief.

Based in Danbury, the lawyers at The Baker Law Firm, P.C., represent taxpayers across the state of Connecticut in innocent spouse matters and other tax issues.