Sometimes an individual underreports his or her income to the Internal Revenue Service (IRS). Whenever the IRS discovers that this has occurred, it will investigate all parties involved, including spouses if the two have filed a joint tax return. If a spouse can prove to the IRS that he or she did not deliberately act in the underreporting of income, that individual may apply for Innocent Spouse Relief.
Innocent Spouse Relief relieves that individual from paying any taxes, penalties and interest on misreported or underreport items on the tax return for which his or her spouse is ultimately responsible for. It applies if your spouse or former spouse omitted or improperly reported items on the joint tax return without your knowledge. The IRS will determine whether you will be relieved of the responsibility for all or a portion of the amount after they approve your request for relief. You must file the form for Innocent Spouse Relief (IRS Form 8857). 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.
There are a number of conditions for qualifying for Innocent Spouse Relief:
- You filed a joint tax return with an understatement of tax due to unreported income or incorrect credit(s), deduction(s) or basis(es).
- At the time of signing the joint tax return, you did not know, and had no reason to know, that there was an understatement of income.
- It would be unfair to hold you liable for the understatement of income and tax due to facts and circumstances.
- Neither you nor your spouse (or former spouse) have transferred property to one another as part of a fraudulent scheme, defrauding the IRS or another third party, such as a creditor, ex-spouse or business partner.
There are several terms that need clarification:
- Unreported income is any gross income not reported by you, your spouse or former spouse to the IRS. This would include income from self-contractor work, reported on a 1095; any income reported on a W-2; or any other income the IRS discovers that has gone unreported.
- Improper deduction, credit or basis is any expense that were not really paid, did not qualify as a deduction or for which no factual argument can be made to support the deductibility of the expense claimed.
- Reason to Know is whether you had any actual knowledge of the misreported or omitted taxes. The IRS will determine whether or not there is a basis for your lack of knowledge. 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 extent of your participation in the activity that resulted in the erroneous item.
- The nature of the erroneous item and the amount of the erroneous item relative to other items.
- Your educational background and business experience.
- 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.
- The financial situation of you and your spouse (or former spouse).
- 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).
Furthermore, the IRS will also determine whether or not it is fair to hold you liable for the return. The following criteria are some examples that the IRS will consider:
- Your spouse (or former spouse) deserted you or you are divorced or separated from your spouse.
- You received a significant benefit from the understatement either directly or indirectly.
Claiming Innocent Spouse Relief requires the assistance from a tax professional. Bullseye Tax Relief can offer help with all sorts of tax problems. We are an expert in tax resolution. Call us today so that we can guide you through the process or even determine if claiming an Innocent Spouse Relief is the best option for you.