When spouses decide to file a joint income tax return, any tax liability that emanates from the return is considered a “joint and several liability.” This means that the tax liability is owed in its entirety by both spouses. For example, if a couple files an income tax return that results in a liability of $100,000, and one spouse dies, the surviving spouse still owes the entire $100,000 liability. There are also situations where a joint income tax return is filed that reflects a refund, but the refund is taken and applied toward a liability owed by only one of the spouses who filed the joint return. In circumstances like these that are unfair and create inequity for one of the spouses, one of the following spousal relief remedies may be available under IRC (Internal Revenue Code) 6015.
Injured Spouse Relief
Injured spouse relief may be available in situations where the income tax refund of a jointly filed return is taken and applied toward a debt that is owed solely by one spouse. The most common situation where this occurs is when one spouse (i.e., the “obligated spouse”) has delinquent tax debt or student loan debt, and the other spouse (i.e., the “non-obligated spouse”) does not. To protect the portion of the joint income tax refund that is attributable to the non-obligated spouse, IRS Form 8379 – Injured Spouse Allocation, should be filed together with the joint income tax return. IRS Form 8379 can be filed by itself after a joint tax return is filed but it is best to file it with the joint tax return filing. Different procedures apply when IRS Form 8379 is filed with a return and by itself, so if you or your tax return preparer are not sure how to file for Injured Spouse Relief, feel free to contact McLaud Law P.C.
Innocent Spouse Relief
Separation of Liability
Under this type of spouse relief, the understatement of tax, plus penalties and interest is separated between both spouses. The understatement of tax is generally allocated based on the amount of income and deductions that are attributable to each spouse. Essentially, the computation of tax due by each spouse approximates the outcome that would be realized had each spouse filed their own separate income tax return. As such, it might not be beneficial to the requesting spouse to elect this type of relief if their proportion of income and deductions are greater than the non-requesting spouse.To qualify for separation of liability relief, you must (on the date you file for relief) be divorced from, legally separated from, or living (for a continuous period of 12 months) in a separate household from the spouse with whom you filed the joint return.
For spouses who do not qualify for either innocent spouse or separation of liability relief, equitable relief might be an option. As compared to innocent spouse relief or separation of liability relief, equitable relief can apply in circumstances where there is an understatement of tax or an underpayment of tax. In other words, even if there was an underpayment of tax (i.e., a balance due) at the time a joint income tax return was filed, equitable relief is still a possibility. Ultimately, if the IRS determines that it is unfair to hold you liable for the understatement or underpayment of tax after considering all the facts and circumstances, equitable relief is usually granted. Unlike innocent spouse or separation of liability relief, the time limit to request equitable relief depends on whether you are seeking relief from an underpayment of tax, seeking a credit or refund, or both.
Factors Considered for Determining Whether to Grant Spousal Relief
The are several factors that are considered by the IRS to determine whether to grant spousal relief (e.g., innocent spouse, separation of liability or equitable relief) including but not limited to, (1) whether you received a significant benefit from the understatement of tax, (2) whether the non-requesting spouse deserted you, (3) whether you and your spouse have been divorced or separated, (4) whether you had knowledge of the understatement/underpayment of tax at the time the joint return was filed, and (5) whether you were the victim of spousal abuse, domestic violence or were under duress before the joint return was filed. If the IRS can prove that you or your spouse transferred assets for the purpose of avoiding payment of tax or that at the time you signed the joint return, you had actual knowledge that there was an understatement of tax, spousal relief can be denied. In summation, the IRS will consider all the facts and circumstances of your case to determine whether it is unfair to hold you responsible for the understatement/underpayment of tax.
Practicalities to be Considered
As you can imagine, the IRS generally does not want to let a spouse “off the hook” from joint and several liability, which makes it difficult to obtain spousal relief. It has been our experience that the IRS seldomly grants spousal relief at first glance, which often forces the requesting spouse into a situation where an appeal or U.S. Tax Court Petition must be filed before the IRS will conduct the necessary level of review to justify granting spousal relief. Both the evaluation and presentation of a request for spousal relief is complex and is best handled by a competent tax practitioner with experience in handling such matters. There may also be collection alternatives that are more viable than a spousal relief application, which is also best evaluated by a skilled and experienced tax resolution professional. If you or someone you know is considering an application for spousal relief, please feel free to contact McLaud Law P.C. for a free initial consultation. Serving Rochester, Webster, Greece and Irondequoit NY.