Marriage & Taxes:

Criteria for Innocent Spouse Rule

In 1988, the law made a vast improvement for protecting innocent spouses from the wrongdoings of their significant other thorough the Innocent Spouse Rule. There are two different types of innocent spouse relief – traditional relief and separate liability. Traditional relief is granted when they file a tax return jointly and they were not aware that their spouse was claiming unfounded deductions or was not reporting all of his income. Under this type of relief, your client is not held responsible for penalties or interest owed when the IRS discovers this. In order to qualify for traditional relief, they must meet the following criteria:

  • At the time the return was filed they did not know, nor did they have any reason to know, that the tax would not get paid.
  • The unpaid tax is attributable to their spouse.
  • Were relief not granted, they would suffer unnecessary hardship.

If your client does not meet the prior requirements for traditional relief, they may qualify for relief if it would be inequitable to hold them liable for the IRS' demands.

Here is a short list of some of the thing the IRS takes into consideration when reviewing this type of request:

  • Your client's marital status – being separated or divorced is in their best interest
  • If they would forego undo economic hardship
  • If they experienced domestic abuse at the hands of their spouse
  • Whether there is an agreement binding the obligation of tax payments to their spouse
  • If they had knowledge that the tax was not going to be paid (this will be held against them)
  • If they benefited by not paying taxes (this is also held against them)

Electing separate tax liability is the other type of innocent spouse relief that may be granted. This form of relief is available even if the IRS believes your client should have known about discrepancies the IRS has found on their spouse's tax return. In this case, they may elect to limit their liability to what they would owe had they filed separately. In order to qualify for separate tax liability, the following criteria must be met:

  • Your client must be divorced, legally separated, or have not been living with their spouse for the past twelve months
  • They must have had no actual knowledge of the phony deductions or the unreported income. The IRS may be able to claim that they should have known, but cannot claim that they had actual knowledge.

Even if they do not meet the above listed requirements, the IRS has the authority to grant separate liability relief if it feels that it would be inequitable not to do so.

Following are some final addition tips and rules of innocent spouse rules:

  • Whether electing to use the traditional relief or separate liability relief, your client must file IRS Form 8857, Request for Innocent Spouse Relief.
  • They must elect to use the innocent spousal relief within two years from the day the IRS begins its collection efforts.
  • Transferring assets between spouses so that one owes all the taxes while the other holds all the assets so the IRS cannot seize them does not work.
  • Relief is available for all taxes regardless of how old they may be. They may even reapply for relief even if they were denied the relief under an old law.
  • The IRS must and will notify their ex and give him/her the opportunity to object to what they are doing.
  • While their application for relief is pending, collection attempts against them by the IRS must be suspended.
  • If their application for relief is denied, they may make an appeal to the US Tax Court. They must appeal within 90 days after they have received the notice of denial to make their appeal.
  • When married partners separate, IRS Form 8822, Change of Address, should be filled out to inform the IRS where they can contact each spouse so that all notices sent to one are also sent to the other.
  • They are entitled by the Taxpayers' Bill of Rights to know what the IRS is doing regarding collections for a tax bill owed jointly by them and an ex-spouse. They are also entitled to know how much of the bill has been paid.