Posted in Triplett & Carothers on January 6, 2022

Sometimes, marriage can stymie the financial life of even the savviest person. You go along living your life, working, eating, sleeping — and suddenly you discover that your household paid far too little in taxes. What’s worse, you signed the joint return. Now what?

You can request innocent spouse relief to walk away from paying tax, interest, and penalties. Your spouse or former spouse has to pay. But innocent spouse relief only applies to individual income or self-employment taxes. Household employment taxes, individual shared responsibility payments, business taxes, and trust fund recovery penalties for employment taxes are not eligible for innocent spouse relief.

When do you qualify for innocent spouse relief?

• You filed a joint return with an understatement of tax because of erroneous figures that your spouse put in.
• You didn’t know and had no reason to know that there was an understatement of tax.
• It would be unfair to hold you liable for the mistake because you knew nothing about it.
• Neither you nor your spouse has transferred property to the other as part of a fraudulent scheme.

What kind of erroneous figures cause these problems?

• Unreported income: any gross income item received by your spouse or former spouse that’s not reported.
• Incorrect deduction, credit, or property basis.

When you file for relief, you will be asked: Did you have reason to know or actual knowledge of the understatement or would a reasonable person in similar circumstances have known about the understatement? This may be the hardest point to prove.

The IRS says it considers all the facts and circumstances in determining whether you had reason to know of an understatement.

Let’s see what’s taken into account:

• The nature and amount of the erroneous item.
• Your financial situation and that of 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 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, such as an omitted income from an investment regularly reported on prior years’ returns.

But even beyond those, there are other factors that can affect the IRS’ decision:

• Whether you received a significant benefit directly or indirectly from the understatement.
• Whether your spouse or ex-spouse deserted you.
• Whether you and your spouse have been divorced or separated.
• Whether you received a benefit on the return from the understatement.

Calculation Example

The IRS gives an example of how relief may work: At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Subsequently, the IRS finds out that your spouse’s unreported gambling winnings were actually $25,000. You must establish 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 that you knew about at the time of filing, but did not report, will not qualify for relief.

A final key point: Unlike most tax errors, where the IRS has to prove non-compliance, the innocent spouse ruling places the burden of proof on the claimant. But if you think you legitimately deserve the relief, speak with a qualified tax professional.

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