Innocent Spouse Relief

What Is Innocent Spouse Relief?

Innocent Spouse Relief applies if your spouse (or former spouse) having omitted or improperly reported items on your tax return without your knowledge. Innocent Spouse Relief relieves you from paying any penalties, interest or taxes on the misreported or unreported items on the returns, if approved by the IRS. The IRS may relieve you from some but not all responsibility for the misreported taxes in which case, you are responsible for paying whatever fees apply to what the IRS did not approve for relief. The IRS will calculate for you what fees you are and are not responsible for after you file the form for Innocent Spouse Relief (Form 8857).

What Types Of Tax Returns Does Innocent Spouse Relief Apply To?

Per the IRS, Innocent Spouse Relief only applies to individual or self-employment taxes, it does not apply to business taxes, household employment taxes, individual shared responsibility payments or trust fund recovery penalty employment taxes.

How Can I Qualify For Innocent Spouse Relief?

In order to qualify for Innocent Spouse Relief according to the IRS, you must meet the following conditions:
  • You filed a joint return which has an understatement of tax due to unreported income or incorrect deduction, credit or basis.
  • You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax.
  • Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
  • You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

What Counts As Unreported Income?

Unreported income is any gross income that is not reported by your spouse (or former spouse).

 

For example:

  • If your spouse received a 1095 from any self-contractor work and did not report it.
  • Any income from a W2 that is not reported.
  • Any income that the IRS might be made aware of that has gone unreported.

What Counts As Incorrect Deduction, Credit Or Basis?

This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse).

 

For example:

  • The expense for which a deduction is taken was never paid, such as making a deduction for office supplies but never purchasing office supplies
  • The expense does not qualify for a deduction.
  • No factual argument can be made to support the deductibility of the expense.

What Counts As Reason To Know?

The IRS will look into whether you had any actual knowledge of the misreported or omitted taxes and if you did not, they will determine if you are telling the truth by whether or not there is a basis for you to be unaware.

 

According to the IRS:

 

“The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement of tax due to an erroneous item. The facts and circumstances include:

  • The nature of the erroneous item and the amount of the erroneous item relative to other items.
  • The financial situation of you and your spouse (or former spouse).
  • Your educational background and business experience.
  • The extent of your participation in the activity that resulted in the erroneous item.
  • Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question.
  • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns).”

In addition to figuring out whether or not you had actual knowledge or reason to know of the misreported tax return, the IRS will also determine whether or not it is fair to hold you liable for the return.

 

The following are examples of factors the IRS will consider.

  • Whether you received a significant benefit (defined next), either directly or indirectly, from the understatement.
  • Whether your spouse (or former spouse) deserted you.
  • Whether you and your spouse have been divorced or separated.
  • Whether you received a benefit on the return from the understatement.

Next Steps:

Claiming Innocent Spouse Relief can often be tricky and may require further assistance from a tax professional in order to receive approval for a claim. To find out if claiming Innocent Spouse Relief is best for your situation, give us a call and we can guide through how to best file a claim or if there are any alternative options to relieve you of your tax liability. Check out more tax problem resolution that we offer.

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