What Is The “Innocent Spouse” Rule?

What Is The “Innocent Spouse” Rule?

Marriage is a funny thing in the eyes of the law. It’s a union of two people, both spiritually and legally — and it has major implications for tax obligations, as well. As we all know, sometimes marriages don’t work out. Sometimes they result in a financial mess, whether that mess is created intentionally or not. And sometimes, what’s fair for one spouse isn’t equitable for both.


Believe it or not, the IRS is actually pretty good about offering a variety of options for both single individuals and spouses who find themselves in a bind when it comes to their taxes. Today, we’re taking a deep dive into the IRS’ innocent spouse relief program and exploring potential options, should you find yourself in this uniquely tricky scenario.

 

Understanding The Innocent Spouse Rule

 

In order to fully unpack the innocent spouse relief rule, we first have to understand a little bit about the way the US government and the IRS view married couples from a taxable standpoint. As you may know, there are two options for married couples filing their tax returns: filing jointly, or filing separately.

You need to realize that filing separately is absolutely not the same thing as filing as though you were “single.” In fact, married filing separately is a rather uncommon tactic, as this approach almost always results in a higher tax obligation. Thus, the vast majority of married couples file jointly.

Yet, as we know, in many of those marriages there will not be an equal involvement in the couple’s finances. In some marriages, one partner handles all the money matters, perhaps in exchange for other household concerns being handled by the other partner. And unfortunately, there are also many financially abusive marriages in which one partner has a vice grip on the couple’s tax prep and finances, leaving the other partner totally in the dark — and potentially an unwitting accessory to tax fraud.

It’s for that exact reason that the IRS has codified a powerful avenue called “innocent spouse relief” into US tax law. Essentially, it’s an escape hatch for one married partner to claim ignorance of the other’s mistakes or criminal wrongdoing. This is important, because when filing jointly as a married couple, the two partners are viewed as one in the eyes of the law. That means both partners take equal and joint responsibility for the information they submit to the Internal Revenue Service.

You can see the potential problem: if one spouse decides to embark on an illegal tax scheme — or if they’re simply incompetent at preparing their taxes — the other partner will legally take the full brunt of the consequences as well. This is an obvious concern, particularly in malicious cases where one partner is financially abusive or controls the couple’s finances totally.

 

What Are The Three Types of Innocent Spouse Relief?

 

Generally speaking, most relief offered by the IRS when it comes to innocent spouse protection is going to fall under one of three main umbrellas: classic innocent spouse relief, separation of liability, and equitable relief. Let’s take a closer look at these avenues to understand exactly who can best benefit from the unique protection afforded by each one.

  • Classic innocent spouse relief
      • In this scenario, you are claiming a very specific (and unfortunately, very common) situation. You state that you signed your tax return with zero knowledge of the mistakes or deception created by your spouse. That can include everything from clerical errors, to math mistakes, to willful misrepresentation of income or tax obligation. To take advantage of classic innocent spouse relief protection, you need to convince the IRS that you were a completely unwitting party to the tax return preparation, and that it would be patently unjust to hold you responsible for the consequences of that incorrect reporting.

 

  • Separation of liability
      • This scenario is most frequently employed when the spouses have recently divorced or separated. It essentially disentangles each partner’s tax bill from the other’s — despite the lingering overlap that can sometimes exist in the early or mid stages of a divorce or separation. Separation of liability is just what it sounds like: it clearly defines each partner’s obligation and financial role in the couple’s overall tax picture. Since, in this scenario, the relationship is presumed to be deteriorating or already toxic, this can be an important protection when one spouse is willfully or maliciously manipulating finances.

  • Equitable relief
    • The equitable relief scenario is the “catch-all” option for cases that don’t neatly fit into either the “classic” or “liability separation” buckets. Essentially, in an equitable relief situation, you’re asking the IRS to weigh all the unique facts of your case and provide you with tax, interest, or penalty relief as a result of a temporary separation, unavoidable hardship, etc. Interestingly, the equitable option is the only one that provides relief from understatement or underpayment of tax.

 

How Can I Get Innocent Spouse Relief?

 

As you can imagine, many people who seek information about innocent spouse relief are in a precarious position. They’ve recently learned of major wrongdoing (or errors) on the part of their spouse, and many of these real-life situations are volatile. Discovering that your husband or wife was carrying out tax fraud right under your nose — to your own legal detriment — can cause some heated situations.

Therefore, it can be worth meeting with a legal professional to discuss your rights and options, should you find yourself in need of innocent spouse relief. A qualified attorney can help further shield you against additional liability and guide you toward the smoothest possible resolution of your situation.

A tax attorney can help take the stress and logistical burden off of your shoulders while pursuing innocent spouse relief, giving you more time to sort out your domestic arrangements and limit additional damage to your way of life. An innocent spouse relief attorney can also use their expert knowledge of this area of the law to give you the very best chance at a successful result when you petition the IRS for relief.

However, if you want to attempt this process on your own, you may request innocent spouse relief yourself starting with Form 8857: https://www.irs.gov/pub/irs-pdf/f8857.pdf

 

Common Questions About The Innocent Spouse Rule

 

  • How long do I have to file for innocent spouse relief?
      • As soon as you are made aware of the liability for which you are not responsible, you should contact a tax attorney (or the IRS directly). The sooner you address this problem head-on, the better likelihood of a positive result. All told, you generally have 2 years from the IRS’ first collection attempt to file for innocent spouse relief. Note that the IRS may take as long as 6 months to determine the validity of your claim.

  • Why is it important to file for innocent spouse relief?
      • Make no mistake, the IRS is deadly serious about financial misrepresentation on tax returns. And when you jointly file a return with egregious errors, you are signing your name (under threat of perjury) to the accurate reporting of those figures… whether you were aware of their accuracy or not. The IRS will then bring to bear a litany of punitive options on you, including audits, fines of up to $250,000, and even criminal fraud charges. If you think that criminal charges stemming from a simple tax return are rare, think again: thousands of people each year aren’t just accused, but convicted of tax fraud.

  • What’s the difference between “injured spouse relief” and “innocent spouse relief”?
      • You may have also heard the phrase “injured spouse relief”, which is a related — but different concept from innocent spouse relief. You’re considered to be an “injured” spouse in this area when your own tax refund is used to mitigate or cover the other spouse’s underpayment or penalties. You can’t be considered an injured spouse unless you paid federal income tax (or at least claimed a refundable tax credit) and have no legal obligation to remit funds towards your partner’s debt.

  • Can the IRS come after a spouse if only the other partner under-represented or underpaid?
    • Yes — if you file jointly, the IRS views you and your spouse as one unit for the purposes of tax law. You will have the exact same consequences, penalties, and responsibilities as a result of your improper tax return, unless you appeal for innocent spouse relief. That’s why this program exists: to provide just relief to an individual who was not complicit in the intentional or unintentional financial misrepresentation made by their partner.