Did you know that Al Capone was sentenced to 11 years in prison for tax evasion and fined $80,000 in October 1931? A tax fraud conviction can cost you up to $100,000 and an average jail time of 3 to 5 years.
Dealing with tax errors can be stressful especially if you could end up with tax fraud charges for not reporting your total income accurately. If you and your spouse made an error in your joint return, you can take advantage of the Innocent Spouse Relief.
While you and your partner are a team, you both don’t need to get punished for a tax error. Keep on reading to learn what is Innocent Spouse Relief and how you can take advantage of these rules.
What is Innocent Spouse Relief?
You don’t have to file jointly simply because you’re married. But there are several benefits to filing jointly like standard deductions and tax brackets. When you file jointly, you and your spouse are both liable for any errors on the tax return.
Even if you weren’t aware of what is on the tax return, you both take responsibility for the accuracy and completeness of the information. For example, if your unpaid taxes are $50,000, you will be responsible for the full amount even if your portion of the income was $10,000. If there is an error, you are both liable for the full amount of tax owing to the IRS.
This is where the Innocent Spouse Relief comes in. If you meet certain conditions, the IRS will collect the unpaid taxes, interest, and penalties from your spouse.
Where you and your spouse are an equal team, this can still help manage the liability issues. You can also use this benefit when your spouse passed away or if you both have separated and they have left you with tax debt.
Tax Errors to Consider
About 44% of Americans are worried about the complexity of the tax system. It’s a long and complex set of rules that can get confusing. You can make errors when filing your return.
Errors on your tax returns can include incorrect or inaccurate deductions or credits. You can end up dealing with unpaid taxes because of underreporting your income or intentionally failing to pay taxes.
For example, you made a deduction of $10,000 for purchased equipment but you didn’t actually buy any equipment. Another example is where you didn’t include lottery winnings in your tax return.
When Do You Qualify?
Let’s talk about some Innocent Spouse Relief tips. You need to know exactly when you qualify for this relief. Getting relief from joint tax debts is beneficial for you in many cases, but you need to meet the following requirements:
- File a Joint Return
- Understated tax because of incorrect deductions or credits or unreported income
- No actual knowledge of understated tax
- Unfair to hold you accountable
Make sure that you do not enter into any transactions before that could be construed as fraudulent transfers of property. This includes any transfers made to third parties, creditors, or business partners to avoid paying taxes. The IRS would not grant the relief in these circumstances.
One of the important elements of qualifying for innocent spouse relief is whether you had actual knowledge of the understated tax. If you had any actual knowledge, even for a portion of the unpaid taxes, then you would be liable for that portion.
The IRS considers that you have actual knowledge if you knew of the unreported income or of the incorrect deductions and credits.
Reason to Know
You can also qualify for Innocent Spouse Relief if you had reason to know about the erroneous items. This requirement does not apply to the Separation of Liability Relief, which only needs actual knowledge.
There are several factors the IRS considers when determining whether you had reason to know about the understated taxes including the nature of the error and the amount. They will also consider your financial situation, educational background, and business experience. They will determine how much you participated in the filing of the tax return.
For example, you and your spouse filed a joint return with an unreported income of $50,000. You may not have had actual knowledge of this unreported income, but you failed to ask questions that a reasonable person would have asked. You thought it was odd to not include that amount in income but chose to ignore it instead of asking more questions.
Another requirement to qualify for innocent spouse relief is whether it’s unfair for the IRS to hold you liable for the understated tax.
Some factors that the IRS considers are whether you and your spouse are separated or divorced, or if your spouse has deserted you. Another factor the IRS considers is whether you received a significant benefit from the understated tax.
You receive a significant benefit if your benefits were above normal support. The IRS considers direct or indirect benefits that you receive.
For example, you may receive $1,000 a month from your spouse for your daily needs. One month, you receive $10,000 that you spent on a vacation.
This additional amount is a significant benefit that you received as a result of the understated taxes. If your spouse provides this benefit years after they filed a joint tax return, the IRS would still consider it a significant benefit.
How Do You File for Innocent Spouse Relief?
When you get Innocent Spouse Relief advice, the first thing they’ll tell you is to file Form 8857 as soon as you become aware of the problem. File it as soon as the IRS starts examining your tax returns for errors or sends you a notice. You need to file it no later than 2 years from when the IRS began its attempts to collect the unpaid taxes from you.
Knowing the right forms and schedules can help you meet your tax deadlines. Form 8857 includes details about your assets and financial situation, which can help the IRS to determine unfairness.
Remember that the IRS will contact your spouse when you file the form. If you already paid part of the unpaid taxes, you would only get a refund for the amount that you paid. When the IRS determines that you do not qualify for Innocent Spouse Relief, you and your spouse will both be liable for the unpaid taxes.
When Not to File
There are certain situations where you should not file form 8857. If a court has reviewed your circumstances and determined that you are not liable for Innocent Spouse Relief, that decision takes precedence. You cannot file the form for innocent spouse relief in those circumstances.
If you have already started negotiations with the IRS and have entered into an offer in compromise to pay the unpaid taxes, you should not file the form. Also, you shouldn’t file the form if you have entered into a closing agreement with the IRS to deal with the same unpaid taxes.
Different Types of Innocent Spouse Relief
There are three different types of innocent spouse relief that you need to be aware of. Each of the different options can offer a different type of relief.
With the classic innocent spouse relief, you can get relief from unpaid taxes, interest, and penalties for any understated amount in your joint return. Your spouse will be held liable for the full amount of unpaid taxes.
Even if you are not relieved of the full amount of unpaid taxes because you don’t qualify for the basic Innocent Spouse Relief, you can get partial relief with the separation of liability relief. The IRS will divide the unpaid taxes between you and your spouse. To qualify for this relief, you have to be divorced, legally separated, widowed, or living apart for a 12-month period.
If you don’t qualify for either relief, you can apply for equitable relief.
The IRS will consider all the facts and circumstances to determine if it would be unfair to hold you liable for the taxes, including whether you suffer from economic hardship if you have to pay the taxes. They will look at your assets, income, and expenses to determine financial hardship.
Steps to Take to Claim Innocent Spouse Relief
Now that you know all about innocent spouse relief, let’s talk about some practical steps you can take when you find out about unpaid liability. The IRS will send a notice and that’s when you will become aware of the unpaid taxes.
1. Review the Notice
When you receive the notice from the IRS, review it fully and get an understanding of what the tax error was. You also need to understand what amount you are liable for.
If you have a basic understanding of your tax obligations, understanding your tax liability will be simple. You may want to consider getting an experienced and qualified tax attorney to take you through the basics.
2. Understand the Obligation
You need to have an understanding of what your obligations are.
It’s not just about what you need to pay, but what options are available to you. Understanding the three different types of relief can help you determine where you fall and what evidence you have to support your position.
3. Evidence to Support Reason to Know
You need to show that you have no actual knowledge or no reason to know about the understated tax. Consider all the different facts that the IRS will look at and see if you can find evidence to support that position. If you can show evidence that you have no reason to know, the more likely it is that the IRS will find that you are not liable for the tax amount.
Keep in mind that even if you can show that you had no reason to know a portion of the understated, it can help reduce your tax liability. Think about your education, experience, and financial background.
4. Evidence to Support Unfairness
You also want to gather evidence to support an “unfairness” claim. You can do that by showing your financial situation, including all of your income and expenses. You can also show your marital status especially if you are separated or living apart.
5. Fill Out the Form and File It on Time
Now that you have all the information, you need to fill out the form and file it within the right time.
This form is important because it is what the IRS will rely on to determine whether you qualify for relief. You want to make sure that there are no errors and that the information is accurate and true.
What Is Innocent Spouse vs. Injured Spouse?
Remember there is a difference between an innocent spouse and an injured spouse. Innocent Spouse Relief is used when there is a tax liability. It helps to assign responsibility, so the right person can pay for the tax liability.
Injured Spouse Relief is designed to allow the injured spouse to get back a portion of a tax refund from a joint tax return. Where a joint return is filed, the amount of tax refund is used to pay the spouse’s unpaid taxes, spousal support, and even student loan payments. The other spouse can get the refund amount back.
You are considered an injured spouse if you were not legally obligated to pay the unpaid tax amounts and you meet any one of the following conditions:
- You have tax payments such as income tax withholding
- You earned income including salaries or self-employment business income
- You claimed a refundable tax credit
Once you qualify as an injured spouse, the IRS can determine whether you are liable for a portion of any of the unpaid taxes.
Contact Our Expert Team Today
What is Innocent Spouse Relief? Now you know exactly the answer to that question, and how it can help you.
You and your spouse are a team, but you both don’t need to get punished for a tax error.
Even with this Innocent Spouse Relief guide, you will need expert advice, especially if the tax errors are complex.
Contact us today and get professional advice from qualified attorneys. We offer competitive pricing with a solid history of success negotiating IRS debt to zero.