Tax season is upon us, and with it comes the typical anxieties that generally go hand-in-hand with dealing with Uncle Sam. Believe it or not, though, the IRS is not always out to get us: In some cases, it creates systems that help consumers recover from financial errors or setbacks.
One such example is known as Innocent Spouse Relief. This is a form of tax relief that can relieve you of your tax liabilities, interest payments, and penalties you may face if you file a joint tax return with a spouse or ex-spouse.
The IRS created this relief mechanism with the underlying justification of fairness: Generally, both spouses are held equally responsible for what they fie on their joint tax returns. However, arguably, it would be unfair to hold both spouses liable for an error made by only one. This is particularly applicable in situations in which the spouses separate or divorce and later, it becomes known that one spouse made an error on a tax filing, resulting in a substantial tax burden for the other spouse.
What Innocent Spouse Relief Does for Taxpayers
In short, Innocent Spouse Relief does three things – or, in other words, has three key benefits for you as a taxpayer.
- It can relieve you from having to pay taxes, penalties, and interest stemming from a joint tax return that you filed with your spouse or ex-spouse.
- It can help you avoid tax liability resulting from errors or mistakes that someone else made on your joint tax return.
- Finally, it can relieve you of a financial burden if, by your spouse or ex-spouse’s fault, you’ve wound up with tax debt.
Types of Innocent Spouse Relief
Generally, both the IRS and some states offer a few different types of innocent spouse relief, namely:
The most common type of innocent spouse relief, this applies to under-reported tax obligations that result in erroneously applied tax liability.
Relief by Separation
This applies in cases of separation and divorce, in other words, when an understatement of tax is allocated between you and your former spouse.
In some cases, relief is available for an understatement of tax as well as an underpayment. This type of relief may apply if someone doesn’t qualify for the first two types of relief but, nonetheless, should not be held liable for tax obligations.
How Do I Qualify for Relief?
Per the IRS, there are a few qualifications for innocent spouse relief:
First, you must have filed a joint tax return with your spouse or ex-spouse.
Second, there must have been some error on your return that resulted in an understatement of your tax liabilities. The IRS refers to these errors as “erroneous items” and in general, they include unreported income (any gross income you or your spouse received that you did NOT report), or incorrect deductions or credits claimed by you or your spouse.
Third, you must establish that at the time you signed the joint return you didn’t know (and had no reason to know) that the tax was understated. The law is unclear on what it means to “have no reason to know,” and different states hold claimants to different standards. For instance, some state laws say that the spouse is not entitled to relief unless he or she has carefully reviewed the tax returns and personally investigated any suspicious sections in it. Others, however, think this standard is too high and apply a looser standard to determining whether someone qualifies for relief. Regardless, while most tax disputes place the burden of proving noncompliance on the IRS, the “lack of knowledge” portion of the rule forces taxpayers to prove that they did not know of the errors – otherwise, they’ll likely be held liable for the tax obligations.
Fourth, considering all the circumstances, it would be unfair to hold you liable for the understatement of tax. The IRS will consider all facts and circumstances in determining whether it’s unfair to hold you liable for the tax obligations. Some factors the IRS will consider include, among others:
- Whether you received a substantial benefit from the understatement of taxable income
- Whether your spouse deserted you
- Whether you and your spouse have been separated or divorced
- Whether you received a benefit on the return from the understatement
Different courts and different states may apply different standards, however, so be sure to consult an experienced tax attorney if you think you may qualify from this type of relief or if the IRS is coming after you for alleged tax obligations.
And finally, you and your spouse (or former spouse) have NOT committed fraud in any way – for instance, by joining in a scheme to defraud the IRS. Fraud will cancel out any right to relief.
Contact Our Experienced Tax Attorneys
If the IRS is after you for a tax debt that started when you filed a joint return with a spouse, and you don’t know what your spouse or ex-spouse did, we can help. Our team of experienced tax attorneys can help you gather the right facts, structure them into a valid case, and present evidence to the IRS to prove your statements.
At Wilson Ratledge, our tax controversy attorneys represent taxpayers in disputes with the IRS and the North Carolina Department of Revenue. We regularly handle disputes involving tax liens, audits, and collections, as well as other various aspects of tax controversy and litigation. For assistance, contact one of our experienced North Carolina tax attorneys today at 919-787-7711 or via our contact form below. We look forward to serving you.