When you file a joint tax return, both you and your spouse are jointly and individually responsible for any tax, interest, and penalties due. However, in some instances you can be relieved of your responsibility if your spouse (or former spouse) improperly reported items on the tax return or omitted them entirely (without your knowledge). To start the process, you need to file an IRS Form 8857, Request for Innocent Spouse Relief.
Innocent Spouse Relief Qualifications
To qualify for Innocent Spouse Relief, you must meet ALL of the following five requirements:
- A joint return was filed for the year in which relief is requested.
- There is an understatement of tax, not attributable to you.
- You did not know and had no reason to know (knowledge) of the understatement of tax at the time the tax return was signed.
- Considering all the facts and circumstances, it would be inequitable (unfair) to hold you liable for the understatement of tax.
- Your request is made within two years from the date of the first collection activity, unless an exception applies.
The crux of any Innocent Spouse Claim is “knowledge”, either actual knowledge or constructive knowledge. You should have a good understanding of the knowledge element as you move forward.
The IRS focuses on what the “requesting spouse” (the spouse filing the claim) knew or had reason to know of at the time the tax return was signed. It does not matter what the requesting spouse knew after signing or at the time the claim for relief is filed. The requesting spouse has the burden of showing that he or she did not know and had no reason to know of the understatement of tax or the underpayment of tax.
For example, “did not know” might mean that your spouse or ex-spouse had a secret account in his name only; that the money in the secret account generated the tax liability in question; and that you never saw any banking activity relative to that secret account, nor did you have access to it. That is, all activities relative to the secret account were hidden from you. "Did not know" is considered "actual knowledge”, and the requesting spouse has the burden to show that he or she had no actual knowledge of the activities giving rise to the tax liability in question.
Constructive Knowledge is a different type of knowledge altogether. It is also known as, “reason to know”. The inquiry can be best stated as: would a reasonable prudent taxpayer have known that the tax return reflected an understatement or underpayment of tax?
So, what tells us what a reasonable prudent taxpayer might or might not know?
Here are some of the factors:
- The level of education and business background of the requesting spouse – as compared to the spouse or ex-spouse.
- The level participation in the household finances by the requesting spouse
- The level participation by the requesting spouse in the activities that caused the tax deficiencies
- Whether there were any extravagant or unusual family expenditures as compared to the past and the income reported on the tax return (a $10,000 vacation on $30,000 income)
- Threats, verbal, or physical abuse
- Deceit by the spouse or ex-spouse
- Restricted access of the requesting spouse to family financial matters (locked out of banking)
In addition to the knowledge elements, there are others, like principles of fairness. However, without overcoming the “knowledge” element, actual or constructive, your Innocent Spouse Claim is likely to fail. It is imperative that you communicate the lack of “knowledge” element clearly and concisely and that it is supported by facts. It is best practice to offer the IRS documentary and testimonial evidence.
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