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Federal tax relief for spouses innocent of understated joint liability

A vehicle for relief is available through the IRS for so-called innocent spouses who signed joint returns not knowing that their spouses were understating tax liability.

It can be shocking to learn that your spouse or ex-spouse had you sign a joint federal tax return that deliberately understated the taxes owed. You trusted that he or she had it prepared correctly and would never have signed an inaccurate return, but now you are being assessed for part or all of the federal tax deficiency by the Internal Revenue Service.

When spouses sign a joint return, they are jointly and severally liable for any tax owed. That means that each of them alone is liable for the entire tax amount. It seems especially unfair that a spouse would sign a joint return believing it was properly prepared and then end up legally liable for the entire resulting tax deficiency.

Even a divorce agreement in which the dishonest spouse agrees to assume responsibility for any underpaid taxes will not be recognized by the IRS as relieving the other spouse from liability.

This unfortunate situation is not that uncommon and Congress included innocent spouse relief in the Internal Revenue Code to cover this and similar scenarios. Three different kinds of relief are available:

  • Innocent spouse relief: The innocent spouse must not have known of the "erroneous item" of the other spouse (such as an incorrect deduction, credit or property value; or unreported income) or have had reason to know, and it would be unfair to hold the innocent spouse liable.

  • Separation of liability: The tax deficiency can be separated in proportion to the spouses' income and assets (rather than holding the innocent spouse liable for the whole deficiency) if there has been divorce, legal separation or a 12-month physical separation. If the "innocent" spouse knew of the incorrect item when signing or either spouse transferred assets to avoid taxation, this relief is not allowed.

  • Equitable relief: If neither of these bases for relief is available, the IRS can grant relief based on unfairness, considering the facts and circumstances, such as having been pressured to sign under duress for fear of family violence.

Relief may be applied for by filing Form 8857 or a letter containing the same information covered by the form. It is important to seek legal advice as soon as possible after receiving notice from the IRS of a deficiency in these circumstances because, with some exception, usually a request for relief must be filed within two years of the first attempt to collect the tax.

Unfortunately in situations with a history of domestic abuse, when innocent spouse relief is requested, the IRS must notify the other spouse to give him or her the opportunity to respond, but the agency does keep some personal information private.

Innocent spouse situations are very fact intensive and complex legally, so it is smart to speak with a tax attorney about the problem as soon as it becomes apparent for advice and representation.

From their offices in Fort Lauderdale, Miami Beach and Florida, the attorneys at Bucci Law Offices represent taxpayers worldwide in innocent spouse situations and many other tax-related problems.