Injured Spouse Allocation (IRS Form 8379)  provides a spouse relief from obligations owed by the other spouse. The allocation preserves any tax refund for the non-owing spouse. These obligations generally pertain to obligations not related to taxes from jointly filed tax returns and may include such debts as:

–       Prior year(s) Federal taxes still owed

–       domestic support obligations

–       other non-tax governments debts

Innocent Spouse Relief (IRS Form 8857) may be available to spouses or former spouses seeking relief from understated tax liabilities related to jointly file joint returns and is the focus of this short blog.

When a husband and wife elect to file a joint federal income tax return, each spouse becomes jointly and severally (together and each individually) liable for the tax due on their combined taxable income.

A spouse or former spouse who has made a joint return may elect to seek relief from joint and several liability for any tax due. This election is made by filing IRS Form 8857.

Former spouses include those no longer married or legally seperated, at the time that Form 8857 is filed. Former spouses, for this purpose, may also include separated spouses that have not lived in the same household during the 12 months prior to filing form 8857.

In order to receive relief from liability for the taxes due, the spouse (or former spouse) on a jointly filed tax return must meet all of the following requirements:

(a) a joint return has been filed,

(b) there is an understatement of tax attributable to erroneous items,

(c) that he or she did not know, and had no reason to know, that there was such understatement,

(d) it would be inequitable to hold the other individual liable for the understated taxes, and

(e) makes the election within 2 years of the date the the IRS begins collections on the understated. tax.

A joint return is considered filed if it was the intent of the spouses to file a joint return. Generally both spouses signing the tax return demonstrates that a joint tax return was intended. However, failure of both spouses to sign the return is not, of itself, mean that a return was not jointly filed. A return can be considered jointly filed even if not signed by both spouses. The facts and circumstances will dictate whether a joint return was intended.

Tax is attributed to the spouse that is responsible for reporting the income on which the tax is based or to the spouse that  is typically in charge of the records and documentation used in preparation of the tax return. This could be one or both spouses.

A spouse is considered to know, or should have known, that income has been ommitted from a return where he or she has knowledge of the activity or transaction that results in the understatement of tax. Knowledge of the activity or transaction does not mean knowledge that the activity or transaction was excluded from the return. The spouse must simply be aware of the activity or transaction that gave rise to the omission.

A requesting spouse is also considered to have had reason to know of an understatement if a reasonably prudent taxpayer in his or her circumstances would have known that the tax liability stated was in error or that further investigation was warranted. The nature and relative amount of the erroneous item, the couple’s financial situation, the requesting spouse’s educational background and business experience, whether the requesting spouse participated in the activity that resulted in the erroneous item, whether the requesting spouse inquired about the item and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns are several factors considered in determining whether a spouse “knew or should have known.”

It is, therefore, important that spouses that file joint tax returns understand what income is, or is not, included in the returns filed. Each spouses should exercise reasonable prudence when preparing, reviewing, and filing tax returns.

A spouse that fails to qualify by meeting all of the above requirements may alternatively receive relief where it can be established that it would be inequitable to hold the requesting spouse responsible for the understated the tax. several factors are considered in making this determination. These factors include:

• marital status,
• whether an economic hardship will result from holding the requesting spouse responsible,
• whether petitioner knew or had reason to know of an understatement,
• whether either spouse is obligated by divorce decree or other binding agreement to pay the outstanding Federal income tax liability,
• whether the requesting spouse significantly benefited from an understatement,
• whether the requesting spouse has made a good-faith effort to comply with the income tax laws in later years, and
• whether the requesting spouse was in poor mental or physical health.

These factors are weighed to determine whether based on the facts and circumstances it would be unequitable to hold the requesting spouse responsible for any understated taxes.

THIS BLOG IS INTENDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED AS PROVIDING ANY ADVISE, LEGAL TAX OR OTHERWISE. IT IS IMPORTANT THAT INDIVIDUALS CONSULT TAX AND/OR LEGAL PROFESSIONALS TO ASSIST WITH COMPLICATED TAX MATTERS.