The Internal Revenue Service (“IRS”) normally looks to both currently married and former spouse as the responsible parties for a tax liability.  However, an ex-spouse or former spouse (i.e., divorced, widowed, or separated for 1 year) may be relieved of an unpaid tax liability under the “innocent spouse relief” exception.   

Taxpayers must meet the following guidelines to qualify for innocent spouse relief: 

• Taxpayer filed a joint return which has an “understatement” of tax due to “erroneous” items of a spouse (or former spouse). 
• Taxpayer establish that at the time the join returned signed that taxpayer did not know, and had no reason to know, that there was an understatement of tax. 
• Taking into account all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax.  
• A request for innocent spouse relief will not be granted if the IRS proves that the taxpayer and a spouse or former spouse transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner. 

Generally, the IRS looks to the following to determine whether items set forth in the tax return are erroneous: 

• Unreported income - Any gross income item received by taxpayer’s spouse (or former spouse) that is not reported, and
• Incorrect deduction, credit, or basis - improper deduction, credit or property basis claimed by taxpayer’s spouse (or former spouse). 

The IRS lists the following expenses as examples of erroneous items:

(1)        Taxpayer’s spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of  taxpayer’s joint Form 1040, but never paid for any advertising. 

(2)      Taxpayer’s spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible. 

(3)     Taxpayer’s spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. 

Additionally, the IRS looks to all the other facts and circumstances (including the following) to determine whether the taxpayer had reason to know that the understatement of the tax was erroneous:  

• The nature of the erroneous item and the amount of the erroneous item relative to other items, 
• The financial situation of you and your spouse (or former spouse),
•  Your educational background and business experience, and 
• The extent of your participation in the activity that resulted in the erroneous item. 

In conclusion, the IRS will weight all facts and circumstances in granting innocent spouse relief.  Taxpayers should review the following factors in accessing their eligibility for innocent spouse relief (Notice 98-61 1998-51 I.R.B. 13): 

• The taxpayer requesting relief is divorced, legally separated, or living apart from the non-requesting spouse. 
• The taxpayer requesting relief will suffer economic hardship if relief is notgranted. 
• The taxpayer requesting relief was abused by the non-requesting spouse, butsuch abuse did not amount to duress.   
• The taxpayer requesting relief did not know and had no reason to know thatthe liability reported on the return would not be paid, and in the case ofa deficiency did not know and had no reason to know of the itemsgiving rise to the deficiency.  The non-requesting spouse (i.e., taxpayer not requesting relief) has a legal obligation pursuant to a divorce decree or marital agreement to pay the tax liability.  
• The outstanding tax liability from which spousal relief is requested was solely attributable to the non-requesting spouse. 

For more information or questions about your specific tax matter, please contact the office or click CONTACT US.

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