Are you considered an innocent spouse for tax purposes? What is an innocent spouse and is there a protection for innocent spouses?
Most couples file joint income tax returns as a married couple. This means generally that both parties are responsible for what is on the return, as well as what income should be reflected on the return, but is not. Sometimes the division of labor between husband and wife is such that one of the parties handles the tax return. Sometimes that person places the returns in front of the non-preparing spouse and that spouse signs the returns, not knowing or checking the information in the returns for accuracy. Worse still are cases where the preparing spouse signs both names to the returns and the non-preparing spouse has no clue that the return was ever prepared, filed or what was in the return.
As a result, if the preparing spouse prepares the returns and substantially underreports the income earned, both parties are responsible for the additional tax, interest and penalties that ensue because of the action of the one spouse. Sometimes the unreported income is a result of fraud, gambling, drugs or other illicit activities. The non-preparing spouse may claim that he or she did not have any knowledge of the underreporting and they may genuinely not have any knowledge, but still may be held responsible by the IRS.
There is a procedure to request "innocent spouse" relief from the IRS, which involves filing an IRS Form 8857, which form needs to be filed within two years from the date that the IRS files a levy notice for the tax owed. A person who needs to use this form and request this relief should go to a qualified professional, as certain documents should be attached to the form. The IRS has denied about 2,000 of the 50,000 taxpayers that apply for relief each year, just for filing for this relief after the two year period has elapsed.
While the federal lawmakers are pushing for rule changes for the innocent spouse rule, it is important if the usual non-preparing spouse suspects their partner of failing to include income or making up expenses, that non-preparing spouse should file a separate return. That way that spouse will not be liable for the tax mess created by the other spouse.
Another thing that people may not know is that the IRS can legally disregard a divorce decree. Even if that decree holds you harmless or states that the other party is responsible for the IRS problems, the IRS does not have to follow that provision. That just means that if the IRS comes after you for the entire amount and your former spouse has any assets, you may go after him or her to recover the amount pursuant to that section of the decree. At that point, though, that former spouse probably has no assets to recover or even to pay the IRS their due.
Sometimes an abusive relationship keeps one spouse from taking action or filing a separate return. If this happens, it is recommended that spouse keep a diary or other record to support their fears, which may come in handy later.
Although the IRS will allow the innocent spouse rule to protect some spouses, it is always a better route not to have to trust that they will. If in doubt, file a separate return.
Denice Gierach is a lawyer and owner of The Gierach Law Firm in Naperville. She is a certified public accountant and has a master's degree in management. She may be reached at firstname.lastname@example.org. For more information on Denice and The Gierach Law Firm visit Gierach Law Firm.