Innocent Spouse Relief (Explained)
Innocent spouse relief is a provision in the tax law that allows a spouse to avoid a joint tax liability. It can also allow you to avoid paying a joint tax liability.
This remedy comes into play for married couples and those who are divorced. A prerequisite to this type of relief is that you were married. There must be a marriage, which can include a common law marriage under state law and same-sex marriages.
As explained below, you may be eligible for innocent spouse relief if you file a joint return and you are no longer married to, or are legally separated from, the spouse with whom you filed the joint return. You may also qualify if you are still married.
Innocent spouse relief is complex. It can be used as a shield or a sword. It is often part of marital or divorce tax planning by one or both spouses. These opportunities also raise questions about whether a joint income tax return was only signed by one spouse.
The article explains what innocent spouse relief is, who qualifies, how to qualify, and what it means for you.
So if you are wondering “Do I qualify for innocent spouse relief,” this article is for you. If you are considering filing for innocent spouse or received a letter from the IRS saying that your current spouse (or former spouse) has done so, this article is also for you.
About Innocent Spouse Relief
The term “innocent spouse relief” refers to the authority granted to the IRS to compromise or eliminate taxes for married couples. The IRS is authorized to do this when it would be unfair or inequitable to hold one spouse liable for the other spouse’s tax problems. We’ll consider the factors that the IRS considers in making this determination below.
There are special rules that apply if you live in a community property state, such as Texas or California. You can read about innocent spouse relief in community property states here and a further nuance is explained here.
For now, suffice it to say that there is no definition of innocent spouse. Rather, there are factors that, if met, allow the IRS to erase you or your spouse’s liability for a joint income tax.
If this relief is granted, the IRS will take the one IRS account and “mirror” it. This is how the IRS records the liability on one spouse. Let me explain. When you file a joint tax return, the IRS will record the tax balance, etc. using the first name and social security number listed on the tax return. This is the “primary taxpayer” in the IRS”s records. The couple’s joint tax numbers are recorded in the IRS account for the primary taxpayer. The second-listed spouse on the tax return will not have any information in their IRS account. Thus, if innocent spouse relief is granted, the IRS will usually mirror or copy the account and then show that all or some of the tax is removed from one or both accounts. If you are applying for innocent spouse relief, this is what you want to see happen at the end of the process.
You should also know that if you submit a written request for relief, the IRS has to suspend its collections actions for those years. This prevents any IRS levies, wage garnishments, and property seizures. These enforced collections actions are suspended from the time the IRS receives your request to the time the request is finally accepted or denied.
How is it Different Than Injured Spouse Relief?
Innocent spouse relief can let you off of the hook for understated tax reported on a joint tax return. It can also let you off of the hook for back taxes from a joint income tax liability.
Injured spouse is different. It applies when only one spouse has a tax balance, so there is no joint income tax return involved. Injured spouse relief is a request for the IRS not to take a current year refund or seize property belonging to one spouse for the tax balances owed by the other spouse. A common example is where a taxpayer who does not owe back taxes marries a taxpayer who owes back taxes. Another example is where one spouse operates a business and fails to pay payroll taxes. The spouse that fails to pay payroll taxes may be assessed a trust fund recovery penalty on their personal IRS accounts. Injured spouse relief can help in these situations.
What is the Innocent Spouse Law?
Our tax system is based on laws. These laws are found in the tax code, primarily. The tax code is Title 26 of the United States Code. This Code is abbreviated “I.R.C.” for “Internal Revenue Code.”
The Section you are looking for is I.R.C. § 6015. The statute is relatively short for what it accomplishes. It is just shy of 3,000 words. These 3,000 words can shift a married couple’s liability to one spouse or the other or split it between them.
Section 66 is also an innocent spouse relief provision. It applies if you are married and live in a community property state, such as Texas or California. Section 66 is intended to put you, as a resident of a community property state, in the same tax position as those who live in common law states. We’ll cover this topic later. For now, just suffice it to say that I.R.C. § 66 is very similar to I.R.C. § 6015 and I.R.C. § 66 puts those in community property states on equal footing with those who do not live in community property states.
The Treasury Department has issued regulations for both I.R.C. § 6015 and I.R.C. § 66. These regulations essentially restate the language in the tax code and then add additional language to help explain how the law applies. The regulations are Treas. Reg. § 1.6015-1 through 1.6015-1 and Treas. Reg. § 1.66-1 through 1.66-5.
You can also find a sizable body of court cases and administrative rulings and guidance for innocent spouse relief. There are even IRS publications and instructions that address the topic.
What Are the Innocent Spouse Relief Options?
There are three different types of innocent spouse relief, namely, traditional innocent spouse relief, separation of liability relief, and equitable relief.
Each type has nuanced factors that have to be met to qualify.
Traditional Innocent Spouse Relief
Traditional innocent spouse relief can allow the innocent spouse to avoid liability for improperly reported items or omitted items on a tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from the non-requesting spouse (or former spouse).
To qualify for traditional innocent spouse relief, you have to meet all of the following:
1. You filed a joint return.
2. There is an understated tax on the return that is due to erroneous items of your spouse (or former spouse). Note: Erroneous items include unreported income or tax deductions, credits or tax basis that were reported on your tax return that you did not qualify for.
3. You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed).
4. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax.
Separation of Liability Relief
Separation of liability relief allocates the tax for a jointly-filed tax return between you and your spouse (or former spouse). The amount allocated to you is generally the amount you would have otherwise been responsible for.
To qualify for separation of liability relief, you have to meet all of the following:
1. You filed a joint return.
2. You are either:
a. No longer married to your spouse or are legally separated from your spouse with whom you filed the joint return.
b. You are married but not living in the same household as your spouse for the 12-month period ending on the date you request innocent spouse relief.
3. You did not have actual knowledge of the understated item or items at the time the tax return was filed. Note: the term “actual knowledge” rule means you actually knew of the item of community income or a reasonable person in similar circumstances would have known of the item of community income. This actual knowledge requirement is frequently a basis for denying innocent spouse relief. You can read an explanation of actual knowledge here.
With respect to not living in the same household, this means that you do not live in the same dwelling and are not separated due to a temporary absence from the dwelling. For example, a spouse that goes on a lengthy business trip away from home will not qualify as living apart.
Equitable relief applies if you do not qualify for the two types of relief described above. This type of relief is unique as it applies to a tax debt. Put another way, it applies if you correctly reported your taxes and there is no understatement of tax. It applies if you just have a valid tax debt that both spouses are liable for.
To qualify for separation of liability relief, you have to meet all of the following threshold questions:
1, You filed a joint return.
2. You are not eligible for traditional innocent spouse relief or separation of liability relief.
3. You timely filed your claim for relief (usually within two years after the date on which the IRS first attempted to collect the tax from you).
4. You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner.
5. Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax.
6. You did not knowingly participate in the filing of a fraudulent joint return.
7. The income tax liability from which you seek relief is either:
a. attributable (either in full or in part) to an item of your spouse (or former spouse) or an unpaid tax resulting from your spouse’s (or former spouse’s) income. If the liability is partially attributable to you, then relief can only be considered for the part of the liability attributable to your spouse (or former spouse) or
b. attributable (in full or in part) to you, you if any of the following exceptions apply:
i. The item is attributable or partially attributable to you solely due to the operation of community property law, such as living in Texas.
ii. If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.
iii. You did not know and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit.
iv. You establish that you were the victim of spousal abuse or domestic violence before the return was filed, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s (or former spouse’s) retaliation.
v. The item giving rise to the understated tax or deficiency is attributable to you, but you establish that your spouse’s (or former spouse’s) fraud is the reason for the erroneous item.
If you meet these threshold questions, the IRS will usually grant equitable relief. If you do not meet one or more of the factors, the IRS still may grant relief. In doing so, it will consider the following factors in deciding whether to grant equitable relief:
1. Marital Status,
2. Economic Hardship,
2. Lack of Knowledge (or Reason to Know) of the Understated Tax or Unpaid Tax,
4. Your Legal Obligation (or Lack of Legal Obligation) Set Out in your Divorce Decree,
5. Any Significance Benefit You May Have Received Related to the Taxes,
6. Your Tax Compliance History, and
7. Your Physical or Mental Health.
The IRS will also consider your circumstances and that of your spouse (or former spouse), such as your educational background, financial sophistication, and financial situation and income in excess of normal support costs.
IRS Publication 971 includes examples and explanations for many of these factors. Publication 971 is more helpful that the innocent spouse relief instructions that come with the Form 8857. There are also court cases that clarify these factors and help explain how these factors apply.
You can read an example of how the courts view these innocent spouse factors here.
Can Innocent Spouse Relief Result in a Refund?
The short answer is, yes. An innocent spouse claim can result in a refund being issued to one spouse.
You can read about innocent spouse refund claims here.
What Is Form 8857 and How To Complete It?
The Form 8857 is the form you have to fill out to request innocent spouse relief. The form can be found online or on the irs.gov website.
While the form itself goes through many of the questions, it does not provide a lot of space to provide information. It is advisable to fill in the explanations with a “see the attached written statement” and then include a long-form narrative. The narrative should address all of the factors listed above. It should go into detail for each factor.
The form, explanation, and a copy of any documents (such as a divorce decree) should be sent by certified mail to:
Internal Revenue Service
P.O. Box 120053
Covington, KY 41012
Do not send original documents as the IRS will not return them to you.
How Long Does Innocent Spouse Relief Take?
There is no set timeline for how long the IRS might take in reviewing your innocent spouse claim. As a general observation, we can say that it takes at least three months. In many cases, it takes over six months.
If you need to file an appeal (as described below), that can add another six months to a year to the process.
Part of the delay is that the IRS will contact your spouse or former spouse. They will send him or her a letter asking whether they object to you getting innocent spouse relief. Your spouse or former spouse has the right to object and to say why you should not be granted relief. And no, the other spouse cannot file bankruptcy to avoid your innocent spouse’s claim.
The IRS will then send a preliminary determination letter to you and your spouse (or former spouse). If no additional information is provided, the IRS will send a final determination letter to both you and your spouse (or former spouse).
What if the IRS Denies Innocent Spouse Relief?
If the IRS denies innocent spouse relief, you have the right to an administrative appeal. This appeal is handled by the IRS Independent Office of Appeals. You have to request that Appeals consider your case by filing a written protest. The IRS will then send your written protest and the case file to the Appeals Office.
The IRS appeals officer will review your innocent spouse relief appeal and the case file and schedule a conference with you. Most conferences are held by telephone. They are informal. They are your opportunity to discuss your case with the appeals officer. The appeals officer has wide discretion to settle or not settle your case.
If you are not able to reach a settlement with the appeals officer, you still have the right to ask the U.S. Tax Court to review the matter. You do this by filing a petition with the tax court. The appeals officer will send you a determination letter that explains how to go about doing this (we also have a page on our website that also explains how to file a tax court petition).
The tax court will apply a “de novo” review for cases filed after 2018, which differs from the prior “abuse of discretion” review. This change is significant as the prior court cases that used the old standard are now not binding on the court. You can read about the change in the innocent spouse standard here.
If you do not agree with the U.S. Tax Court’s decision, you have the right to appeal the decision. You can appeal the decision to the appeals court in the Federal Circuit in which you live. For example, Texas is in the Fifth Circuit. So if you live in Texas, you would appeal to the Fifth Circuit Court of Appeals. This decision can in turn be appealed to the U.S. Supreme Court.
What if the IRS Does Not Get Back to Me Timely?
If the IRS does not respond to your request for innocent spouse relief within six months, you can consider this a denial. This enables you to file a U.S. Tax Court petition as noted above.
This is rare. The IRS will usually send you its preliminary decision letter before this six-month period.
Experienced Tax Attorneys
We are experienced tax attorneys in Houston, Texas. We help clients submit innocent spouse claims and defend against these claims. This includes working with the IRS and even litigating claims in the U.S. Tax Court.
If you have questions about innocent spouse relief, we want to hear from you. You can reach us at (713) 909-4906.