By requesting innocent spouse relief, one of the spouses that filed a joint return can be relieved of the responsibility for paying taxes, interest, and penalties if the other spouse (or a former spouse) improperly reported or omitted items on their income tax return.
Generally, when a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax based on the couple’s combined income. Without this innocent spouse relief, IRS will pursue both spouses (regardless of who earned the income) to collect the entire tax plus penalties and interest from the joint return as filed or pursuant to the adjusted tax deficiency that the IRS assesses after an audit.
Innocent Spouse Relief
“Innocent spouse relief” applies to individuals who were unaware of a tax understatement that was attributable to the other spouse. To qualify, you must establish that at the time you signed the joint return you didn’t know and had no reason to know that there was an understatement of tax. Relief is available even if you are still married and living with your spouse. In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they are widowed, divorced, legally separated, or have lived apart for at least one year.
Suppose you make an election to limit tax liability. In that case, the tax deficiency related to erroneously unreported income or incorrect deduction, credit, or basis will be allocated between spouses as if they would have filed separate returns. For example, one spouse will be liable for the tax related to any unreported wage income only to the extent of their earned wages.
In a case when IRS proves that either spouse knew about the understatement items when they signed the return, the election will not provide relief, unless the return was signed under duress.
Injured Spouse Relief
There is also a difference between an “injured” and an “innocent” spouse relief. An injured spouse claim asks IRS to allocate part of a joint refund to one spouse. In these cases, an injured has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse.
If you are interested in obtaining relief, there is paperwork that must be filed and deadlines that must be met. From a planning perspective, it’s essential to keep “joint and several liability” in mind when filing future tax returns. Even though a joint return often results in lower tax liability, you may choose to file a separate tax return in certain unique situations where isolating your tax liability is desired. Everyone’s tax situation is different so please contact your Wegner CPAs advisor if we can assist you in understanding your tax liabilities.