When taxpayers file Married Filing Jointly, they both enjoy all the benefits this filing status allows, but they are also both liable for any tax, interest or penalty that is owed on the tax return. If taxpayers file jointly and later divorce, they are each legally responsible for the entire tax liability, interest and penalties for the years they filed jointly.
Jointly and severally liable, means that each taxpayer is responsible for the total liability even if:
- Only one spouse earned all the income,
- Only one spouse claimed improper deductions or credits
- A divorce decree declares that one spouse is responsible for taxes due on jointly filed tax returns.
When the IRS examines a tax return and determines that the tax liability has increased, they will send a notice to the taxpayers. If a taxpayer believes that the increased tax liability is due solely to the actions of the spouse, then Form 8857 should be filed timely. Form 8857 must be filed within 2 years from the time the IRS begins collection activity.
There are three (3) types of relief from joint and several liability available to affected taxpayers.
Innocent Spouse Relief
If one spouse failed to report all income, or claimed credits and deductions improperly, the other (innocent) spouse may not be held responsible for any additional taxes assessed.
To qualify for relief the following criteria must be met:
- The understatement of tax was reported on a joint tax return,
- When signing the tax return the spouse had no knowledge of the understatement of tax,
- The understatement is due solely to erroneous reporting of one spouse,
- Due to all the information, it would be unfair to hold the innocent spouse liable.
Separation of Liability Relief
To be eligible for separate liability relief the spouses must have filed a joint return, and meet one of the following:
- The taxpayer is no longer married, is widowed or legally separated, or,
- The taxpayer did not live in the same household 12 months prior to filing for relief.
Under the separation of liability relief, the amount of the taxes owed is split between the spouses according to their earnings and assets.
Separate liability relief will not be granted if either spouse transferred assets to avoid paying taxes, or the spouse had knowledge of the irregularity when signing the return.
The taxpayer must be able to prove that he/she meets all the qualifications for relief and establish a basis for the allocation of the liabilities.
Equitable relief may be available when the taxpayer does not qualify for innocent spouse or separation of liability relief. Equitable relief is granted after the IRS considers all the “facts and circumstances” of the individual case. Equitable relief may be granted in a situation of economic hardship.
Equitable relief may be available if:
- you filed a joint return for the tax period at issue,
- the amount of tax was reported correctly on the tax return but was unpaid,
- the amount of tax was understated on the tax return,
- the IRS determines that the innocent spouse is not liable for the understated or unpaid taxes.
- the taxpayer must meet all the other requirements listed in IRS Publication 971, Innocent Spouse Relief
If you are experiencing an innocent spouse tax situation and need assistance, Peoples Tax has expert tax professionals on staff that can help you! Give us a call at (804) 204-1040 or email us today to find out how we can assist you!
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