Let us tell you a story. Some 15 years ago, we encountered a case in which a man’s wife passed away. In the subsequent months, he received credit card bill after credit card bill of which he had no prior knowledge. The bills added up to nearly a million dollars of credit card debt. Unbeknownst to this man, his wife had been opening credit cards, maxing them out, and opening other cards. He went to his CPA who helped him get the debt charged off at 10% owed by explaining what had happened. After months of diligent work and hours upon hours of work, he paid off the debt.
A year later IRS audited this same man because: charged off debt must be declared as income. That $90,000 that was forgiven was regarded by IRS as money that should be declared as income because it is money he owed and did not have to pay. They sent a tax bill on the $90K of additional income.
We took the case. The audit resulted in no money due after the circumstances were shown to IRS. Records of his wife’s betrayal over the years were presented and the IRS agent assigned to the case was convinced to change the verdict to say that no additional taxes were owed. * past results are not a guarantee of results on any other case.
The discovery that a spouse has lied about your shared finances can be devastating. On top of that, being sent a notice from IRS placing tax burdens on the innocent party can throw even the most financially prepared individual into a state of deep concern.
If IRS should find mistakes or fraud on joint tax returns filed by you and your spouse, both parties are legally liable for the errors. Situations, where one spouse was not aware of their partner’s decisions or behaviors, can lead to serious negative financial impact for the innocent spouse. While best practice is to be well informed and involved in all financial statements submitted with your name on them, IRS also offers “Innocent Spouse Relief” in cases where your spouse has acted without your knowledge.
What is Innocent Spouse Relief?
Requesting innocent spouse relief can serve as an opportunity for a partner to claim their innocence in the event of their partner incorrectly reporting or omitting items on your joint tax returns. The taxes, penalties, and interest that qualify for relief are generally collected from your spouse. On the other hand, the responsibility lands on both you and your spouse for those charges that do not qualify for relief. Additionally, innocent spouse relief only applies to independent income.
How do I apply for Innocent Spouse Relief?
Following the filing of Form 8857, IRS will determine the total tax that you are responsible for and what may be eligible for relief. The Law Offices of John D. Milikowsky strongly recommends that you reach out to a qualified tax professional for assistance before submitting this form. The bar is set high to prove innocence and IRS is unlikely to look at a request multiple times as you attempt to strengthen your case.
How do I qualify for Innocent Spouse Relief?
There are a number of conditions required to qualify for innocent spouse relief. They include:
- Filing a joint return with an understatement of tax due to erroneous items by your spouse
- At the time that you signed the joint return, you must not have known or you must have had no reason to know that there was an understatement of tax
- Considering the facts and circumstances of the situation, it would be unreasonable and unfair to hold you liable for the understatement of tax
- You have not transferred the property to one another as part of a fraudulent scheme
What types of relief are available?
Innocent Spouse Relief
Requesting innocent spouse relief can relieve you of responsibility for paying tax, interest, and penalties if your spouse wrongly filed your taxes.
Relief by Separation of Liability
This type of relief allows you and your spouse to divide the understatement of tax between you and your spouse (plus interest and penalties). To qualify for relief by separation of liability, you must have filed a joint return and meet either of the following requirements:
- You are no longer married to or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief
- You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857
Equitable Relief
Unlike in the cases of innocent spouse relief or separation of liability, you may be eligible for equitable relief from an understatement of tax or an underpayment of tax. If you are not eligible for either of the previous relief options, IRS may still consider your eligibility for equitable relief. Conditions for qualifying for equitable relief include:
- You are ineligible for innocent spouse relief, relief by separation of liability, or relief from liability from community property law
- There was no transfer of assets between you and your spouse as part of a fraudulent scheme
- Your spouse did not transfer property to you in an attempt to avoid tax payments
- You did not avoid filing your return with the intention of committing fraud
- You have not paid the tax
- It’s established that given all facts and circumstances, it would be unfair to hold you responsible
- The tax liability that you’re seeking relief for must be attributable to an item of the spouse with whom you filed the joint return
Get Support for Tax Issues as an Innocent Spouse
While the process of filing for Innocent Spouse relief can be overwhelming, our team of professionals at Milikowsky Tax Law has years of experience in both tax law and business planning. We can help you to build a compelling case for your right to innocent spouse relief, using our proprietary audit metric technology and our in-depth knowledge of tax law and IRS negotiation.
Our experienced tax lawyers thoroughly research your specific situation and will help you to develop a clear and irrefutable argument for tax relief.
Following your filing for Innocent Spouse Relief, you can rely on the Tax Lawyers at Milikowsky Tax Law to be there to review future filings to ensure that deceptions that lead to the need to file for Innocent Spouse Relief do not recur.
Contact Milikowsky Tax Law today to find out how we can help you submit an innocent spouse relief form and extricate yourself from undeserved tax burdens.