Scenario: You have just received an envelope addressed to you and your spouse from the IRS. Upon opening the envelope, you are shocked to see that the IRS has adjusted a previously filed joint tax return due to income that was not declared on your original income tax return. Due to the adjustment, you and your spouse now owe thousands of additional dollars in taxes, penalties and fees. However, you were unaware of this additional income. This income is from a business your spouse established, and did not report on your jointly filed tax return. What should you do?
This scenario happens to taxpayers thousands of times annually to people all over the country. In many cases, one spouse handles the family finances, including the filing of federal income taxes, while the other spouse takes care of other family obligations. However, through one situation or another, income is not declared on a tax return, and the spouse who normally does not handle family finances finds out that he or she is jointly obligated to pay thousands of dollars that they may or may not have – all through no fault of their own.
Although this may sound like a desperate situation, the IRS does have a method of relieving the same spouse of this additional financial obligation. By filing an IRS form 8857, Request for Innocent Spouse Relief, the taxpayer is declaring that they should not be financially obligated to pay a debt caused by the actions of their spouse (or in many cases, ex-spouse).
In order to file for Innocent Spouse Relief, a taxpayer must meet the following guidelines:
- They must have filed a joint return
- There is an understated tax on the return due to errors caused by their spouse.
- They must prove that when they signed the tax return, they had no reason to know that the understatement of tax existed.
- Based on the facts and circumstances, it would be unfair to hold the taxpayer liable for the understated tax. (Internal Revenue Service, 2014)
It is important to note that the taxpayer also must not have benefited from any undeclared income, or the IRS might find that the person declaring themselves as an innocent spouse may not be so innocent after all. For example, if the taxpayer made a luxury purchase in cash using the undeclared income, and the spouse was aware of the purchase, benefitted from the purchase, but did not question the taxpayer about how the money to purchase the items was obtained, then the spouse may not be able to use the innocent spouse relief argument in eliminating their portion of the past- due tax debt.
If you ever find yourself in a similar scenario, it is important that you discuss your situation with a competent tax professional who may be able to guide you in determining what are the best option available to you in relieving yourself of this obligation.
Internal Revenue Service. (2014, January 26). IRS Publication 971. Retrieved from Internal Revenue Service website: https://www.irs.gov/pub/irs-pdf/p971.pdf
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.