Common Tax Issues: Innocent Spouse, Separation of Liability, and Equitable Relief

As the New Year moves ahead, many people around the country are looking out for their W-2’s or other tax forms so they can get a head start on filing their 2017 tax returns.  In this blog post, I’d like to spend some time discussing a common tax issue.

Innocent Spouse Relief

One of the most common tax issues that I see is when a person needs to claim Innocent Spouse relief from the IRS on a joint return.  There are actually 3 different types of relief that fall under this broad category.  Innocent spouse relief itself is applicable when your spouse or former spouse failed to report income, reported income improperly, or claimed improper deductions or credits.

To qualify for this type of relief you:

1. Must have filed a joint tax return with an error that is solely the fault of your spouse
2. Show that you didn’t know and had no reason to know that there was an error
3. Must demonstrate that it would be unfair to hold you responsible for the debt.  If you can show these three things, then you can eliminate your liability on taxes or penalties resulting from the error.

Separation of Liability

Separation of Liability relief is a related, but different, situation. To qualify you need to show that:

1. You’re divorced or legally separated from the spouse with whom you filed the return OR
2. You’re widowed , OR
3. You haven’t been in the same household as the spouse at any time during the past 12 month period.

However, even if one of these situations applies, if you had knowledge of the error on your return then you won’t qualify for relief.

Equitable Relief

Finally, you can qualify for Equitable Relief if you don’t qualify for either of the categories.  If you can show to the IRS that, under all the facts and circumstances, it would be unfair to hold you liable for the error, then the IRS can forgive the liability.  The IRS has detailed rules regarding when equitable relief is appropriate published under Revenue Procedure 2013-34.

Injured Spouse

Keep in mind that Injured Spouse is a separate issue.  An injured spouse claim is for allocation of a refund of a joint refund.  Innocent spouse is for relief on a joint liability. You're an injured spouse if all or part of your share of a refund from a joint return was or will be applied against the separate past-due federal tax, state tax, child or spousal support, or federal non-tax debt (such as a student loan) owed by your spouse.  You may be able to recover your portion of the refund as an injured spouse.  The IRS publishes information on their website about how to claim injured spouse status.

Previous Marriages

Often when I meet with potential clients to discuss a possible bankruptcy case, debts that have carried over from a previous marriage are a major concern.  If you had a joint debt with a previous spouse, including a tax debt from a joint return, then filing bankruptcy may be your opportunity for a fresh start.  Not all tax debts can be eliminated with a bankruptcy case, but if you don’t qualify for any of the IRS’s relief programs then it is worth your time to consult with an experienced bankruptcy attorney about options for handling your debt.

 

At Bond & Botes, our attorneys have years of experience handling all types of debts for consumers across Alabama, Tennessee, and Mississippi.  If you have taxes or other debts causing you financial stress, please contact one of our convenient office to set up a free initial consultation.  We will meet with you personally to help plan your way back to financial peace.