Government Expanding Innocent Spouse Tax Relief

What if you were married to a tax cheat? Your name is also on the tax return, if you filed jointly, meaning you could be on the hook for financial, and possibly criminal, penalties.

That's why the Internal Revenue Service (IRS) developed “innocent spouse relief.” If you had no knowledge of the underpayments or non-reporting, you are shielded from some or all liability. Now, the IRS has expanded the provisions of innocent spouse relief by eliminating the two-year time limit that now applies to certain relief requests.

"In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief," said IRS Commissioner Doug Shulman. "This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future."

Review

The IRS said it reviewed the relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:

• The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
• A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
• The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

What innocent spouse relief provides

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse or former spouse improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse or former spouse

However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse or former spouse.

The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount.

You must meet all four of the conditions below to qualify for innocent spouse relief.

1. You filed a joint return which has an understatement of tax due to erroneous items (defined below) of your spouse (or former spouse).
2. You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax (See Actual Knowledge or Reason To Know, defined below). 
3. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. (SeeIndications of Unfairness for Innocent Spouse Relief, later).
4. A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.