What is Innocent Spouse Relief?
Innocent Spouse Relief is a form of tax relief that is available for people who signed a joint return with their spouses and who have good reasons as to why they should not be held liable for additional tax assessed as the result of an audit, or even for the tax that is shown as due on the joint return. At its most expansive level, called Equitable Relief, a request for Innocent Spouse Relief should be granted if, when considering all of the facts and circumstances, it would be unfair to collect the tax liability in question from the person making the request.
Why does Innocent Spouse Relief Exist?
If you file a joint return, the presumption is that you are agreeing that the IRS can collect any underpayments of tax, or any liability that results from an audit from you or from your spouse. This default rule can be found in Section 6013 of the tax code. This can lead to some seriously unfair consequences.
Consider a situation where a husband takes an early distribution from a 401k or Traditional IRA account to use for his own benefit, or maybe he makes business income at a side gig that he does not disclose to his wife. Is it fair to expect his wife to play detective and scrutinize the books of his business, to monitor his eBay/PayPal account or to check his phone to see if the Uber Driver or Lyft app is installed on his phone?
Sometimes these conversations are evaded by the tax-cheating spouse, or sometimes the activity is so well-concealed that the spouse requesting relief has no reason to expect that items are missing from the return. In that circumstance, the spouse should not be held to account for any new tax liabilities that arise from an audit.
Consider, also, a situation where a spouse signs a tax return which actually shows a balance due. Maybe his wife is a realtor, but she owes tax every year because she never pays her quarterly estimated taxes. Is it fair for the husband to be on the hook for a liability that she accrued by not keeping up with her taxes? Maybe, but maybe not. Maybe she told him that she was going to be mailing a check to pay the liability in full with the return, or that she would be establishing an installment agreement with the IRS to pay the liability off. Even if she did not make these representations, maybe there are other reasons that would make it unfair to hold him accountable for the tax liability.
Often, Innocent Spouse cases arise in the context of a divorce proceeding. It is important to know that a divorce decree assigning liability for particular taxes to one spouse does not settle the matter with the IRS. The IRS will still try to collect the tax liability from both spouses unless one spouse files a successful Innocent Spouse request. Whether or not a the taxpayers are divorced will be considered by the IRS, but that is only one factor the IRS will consider. It is important to remember that the IRS will consider all of the facts and circumstances in front of it when making an Innocent Spouse determination. The IRS is not a party to your divorce decree and is not bound by it, but it will still be considered as weighing in favor of relief.
When is Innocent Spouse Relief Available?
Innocent Spouse Relief is available whenever you have a joint tax liability with a current or former spouse. Certain types relief (in the case of an audit) is only available for 2 years after the IRS begins collection efforts. But relief is always available in some form for as long as the IRS can collect (10+ years). In certain circumstances, which I won’t be covering here, it may be beneficial (if the IRS has been trying to collect for less than 2 years) to make a claim for Innocent Spouse Relief under sections 6015(b) and 6015(c).
But the two year limitation is only a bar to certain types of relief. Innocent Spouse Relief is actually available until the IRS can no longer legally collect the tax from the taxpayer. That means you have at least 10 years to file for Innocent Spouse Relief (under “Equitable Relief” provisions laid out in section 6015(f).)
How do I request Innocent Spouse Relief with the IRS?
The most straight-forward way to request Innocent Spouse Relief with the IRS is to file 8857 with the IRS. This form will start the process with the IRS. I need to mention that this form contains many traps and elicits answers that might result in the IRS making a determination against the taxpayer, when it should not. It is important to distinguish between information that you know now when submitting this return and information you knew at the time the return was filed. The form and its instructions do not make this clear or obvious, and it is possible for the IRS to misinterpret the information provided and deny relief on and erroneous assumption.
Do States offer Innocent Spouse Relief?
Yes. Several states simply follow the same rules as the IRS, while other states have their own versions of Innocent Spouse Relief.
Are there any “cons” to filing for Innocent Spouse Relief?
Yes. This is a situation where a commonly cited “benefit” of filing for Innocent Spouse Relief is also a major downside. When you file for Innocent Spouse Relief, the IRS is prohibited from collecting taxes from you while it considers your request. Due to this prohibition, the IRS will also have more time to collect the tax liability in the event that relief is denied. Essentially, the period of limitations for assessment and collection will be put on pause and other 60 days will be added to the time the IRS has to collect or assess a tax debt when you file for Innocent Spouse relief.
Consider the following example:
Tony and Tanya are now divorced. Recently, Tanya received a collection notice from the IRS and decides to file Form 8857 to request Innocent Spouse Relief. The IRS processes her request and puts it in the queue to be reviewed by and IRS employee at the “Cincinnati Centralized Innocent Spouse Operation.” Assume that prior to filing for Innocent Spouse Relief, the statute of limitations on collecting the tax liability, would have “run” (IRS would be SOL) within three months. As soon as the IRS processes that request, the IRS will hit the pause button. If the IRS rejects the Innocent Spouse Request, and Tanya does not appeal the decision, then the IRS will still have five months (the time left to collect before the request was submitted plus 60 days) to collect the liability from her. Even if it takes the IRS several months to consider the request. So, now Tony has seen his tax debt expire, but Tanya still has to fend off IRS collections for another five months. Do you think the IRS will be aggressive in trying to collect the liability from Tanya? I do.
Where can I find out more about Innocent Spouse Relief?
The IRS provides several publications on the Topic of Innocent Spouse Relief, here are a few that you might find helpful:
- IRS Publication 971 provides a basic explanation of what the IRS will consider during an Innocent Spouse Relief, and what is required to request relief. It includes explanations of all of the basic factors that the IRS will consider when processing your case, and provides line-by-line instructions for Form 8857.
- Form 8857 is the form the IRS would like you to file to request Innocent Spouse Relief.
- Tax Topic 205 provides a very brief overview by the IRS about Innocent Spouse Relief.
- The Internal Revenue Manual Section 25.15.1 is the policy and procedure manual that IRS Employees will likely consult when processing your Innocent Spouse Case.
- Proc. 2013-34 contains official IRS positions on the processing of Innocent Spouse cases under the equitable relief provisions of Internal Revenue Code 6015(f) and 66(c).
- Internal Revenue Code 6015 is the actual statute that contains Innocent Spouse Relief provisions regarding joint tax returns, and Internal Revenue Code 66(c) Contains Innocent Spouse Relief provisions for taxpayers who live in a community property state.
Should I hire a Lawyer to help me with Innocent Spouse Relief?
I am a lawyer, so of course I am going to say you should at least consult with a Tax Attorney before submitting a request for Innocent Spouse. You should at least be able to get an idea from your conversation with a Tax Attorney whether or not Innocent Spouse Relief is worth pursuing. You can reach me by email at firstname.lastname@example.org or visit my website, Tom Tax Lawyer, to schedule a consultation.