Law Offices of Jeffrey S. Freeman
The IRS has eliminated the two-year restriction on equitable relief claims under the innocent spouse rule.
September 11, 2011 /24-7PressRelease/ -- For married taxpayers who file their U.S. federal income tax returns jointly, both individuals may be held liable for any unpaid taxes as well as interest on back taxes. For years, however, the Internal Revenue Service allowed "innocent spouses" who had no knowledge of their tax deficiencies to petition the IRS for relief from tax liability up to two years after the IRS started efforts to collect the back taxes. The IRS recently changed the innocent-spouse rule, though, eliminating the two-year restriction on innocent spouse claims for equitable relief.
Individual Liability for Joint Tax Returns
Spurred by a variety of reasons, including certain tax benefits for married couples, many married taxpayers file their federal income tax returns under the married filing jointly classification. Although there are tax advantages to filing a joint tax return, there are also potential disadvantages because each spouse can be held liable jointly and individually for any taxes owed as well as interest and penalties for those unpaid taxes.
Each individual who signed a joint tax return may be targeted by the IRS for payment of the entire tax bill, even if the couple has since divorced, and regardless of whether the divorce decree allocates tax debt to one former spouse only. Further, either individual may be held responsible for complete payment even if the other spouse was the sole earner of their taxable income.
Innocent Spouse Rule
An important exception to joint filers' individual liability for tax debts exists for qualifying innocent spouses. In general, innocent spouses are people who signed joint federal income tax returns with their spouses but did not know and did not have reason to know that their spouses understated or underpaid the amount of taxes they owed. The innocent spouse provisions are intended to provide a measure of fairness in cases where it would be unjust to collect tax debt from individuals who had no idea of their additional tax liability.
Three types of relief exist under the innocent spouse rule:
- Innocent spouse relief
- Separation of liability
- Equitable relief
By petitioning the IRS for innocent spouse relief, the IRS states that an individual may be relieved of liability for taxes, interest and penalties if his or her spouse did something wrong on the joint tax return. Through separation of liability, a married couple's taxes, interest and penalties due are divided between the spouses based on their earnings, assets and tax deductions. The third option, equitable relief, is a way for individuals to eliminate their tax liabilities if they do not qualify under the other two possibilities.
Innocent Spouse Eligibility
To qualify for innocent spouse relief, the following conditions must be met:
- The individual filed a joint tax return that understated the couple's tax liability.
- The understatement was due to "erroneous items" of the spouse like incorrect tax deductions or credits or unreported income.
- The individual did not know and had no reason to know of the understatement when he or she signed the return.
- Considering all facts and circumstances, it would be unfair to hold the individual responsible for the tax owed.
Equitable Relief Claims
People who do not qualify for innocent spouse relief or separation of liability may still seek to remove their tax responsibility by making a claim for equitable relief. According to the IRS, the agency considers several factors when deciding whether an individual qualifies for equitable relief, including:
- The individual's current marital status
- Spousal abuse or domestic violence experienced during the marriage
- The individual's reasonable belief that the tax was going to be paid or his or her lack of knowledge of the understatement
- The individual's current ability to pay basic living expenses
- To whom the tax liability is attributable
- The individual's compliance with tax laws following the year in question
Until recently, an individual could only petition for innocent spouse equitable relief within two years after the IRS began attempting to collect the tax debt. However, effective immediately, the agency has eliminated the two-year restriction on equitable relief claims.
Equitable Relief Time Limit Removed
The removal of the equitable relief time limit follows two cases in which federal courts of appeal upheld the two-year timeframe. The IRS then changed the rule to help taxpayers who did not know such relief existed, did not know about the time restriction or feared a spouse's reaction because of spousal abuse or domestic violence. Regarding the rule change for equitable relief claims, IRS Commissioner Doug Shulman said it "will help innocent spouses victimized in the past, present and future" by allowing them to petition for relief at any time.
According to the IRS, the elimination of the time restriction will apply to current, future and even past equitable relief cases. Therefore, individuals whose past claims for equitable relief were denied solely because they were too late can reapply.
If you would like to know more about innocent spouse claims and how they can help relieve tax liability, contact an experienced tax law attorney.
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