What Are The Four Types of Innocent Spouse Relief?

What is innocent spouse relief?

If your spouse understated taxes on your joint tax return, innocent spouse relief applies when you were unaware of an error on your taxes made by your spouse.

This could be due to unreported income, inaccurate deductions or credits or miscalculated asset values. Whatever the reason, you will not be responsible for any additional taxes if you qualify.

For example, say you filed a joint tax return with your ex-spouse that had a $10,000 tax liability. However, you later receive a letter stating that your spouse had an additional $10,000 tax liability due to unreported income. Even if you have since divorced, you are still responsible for the debt from your joint return — unless you qualify for innocent spouse relief.

However, there are strict eligibility requirements to qualify:

• You and your spouse filed a joint return.
• Your taxes were understated due to errors on your tax return.
• You were unaware of the errors.
• You have not engaged in an offer in compromise with the IRS.
• You have not signed a closing agreement with the IRS for the same taxes.
• A court has not already made a final decision denying relief.
• You have not participated in any related court proceeding seeking relief.
• You live in a community state.

You may also qualify if you knew of the errors but were a victim of spousal abuse or domestic violence before you signed the return. If you signed the tax return because you were pressured, afraid or threatened, you may not be responsible for your spouse’s tax liability.

However, this tax relief only applies in certain cases. While it applies to your spouse’s income from employment and self-employment, it does not apply to certain tax liabilities:

• Your personal income
• Business taxes
• Household employment taxes
• Individual shared responsibility payments
• Trust fund recovery penalties for employment taxes

A few different types of innocent spouse relief are available through the IRS.

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Types of innocent spouse relief

If you feel you are not responsible for your spouse or ex-partner’s debts, here are your potential options for recourse.

Separation of liability relief

Separation of liability relief applies when you have back taxes but are legally divorced, separated or widowed, or you have not shared the same household for 12 months or more since your request for relief. In this case, the IRS may find you responsible only for your portion of the debt.

To be eligible, you must meet the qualifications under innocent spouse relief, and protections still apply for victims of domestic abuse. Additionally, the taxes due must not apply to any property you own jointly with your spouse.

“Timing and eligibility are important,” said Stephen A. Weisberg, lead tax attorney at The W Tax Group, a nationwide tax defense company. “When filing, confirm that the spouse meets the marital status requirements and clearly explain which portion of the tax belongs to each spouse. Any evidence of prior knowledge may sink the request.”

If you are found liable, it does not necessarily mean you will owe half of the bill. The IRS considers the entire financial picture of both spouses, including incomes and assets, before determining how much you each owe. You will then only be responsible for your share.

However, keep in mind that the IRS will not give a refund for any taxes you already paid; it will only remove future tax liability for your spouse’s income and assets.

Equitable relief

If your spouse understated or underpaid your taxes, you may be found not liable under equitable relief.

The same terms apply under innocent spouse relief, but to be eligible for equitable relief, you must be legally separated, divorced or widowed. You also must not have shared the same household for at least 12 months prior to your request for relief. Victims of domestic abuse have protections, and those residing in community property states may also be eligible.

“Equitable relief is the most open-ended relief and is often used when the tax was reported correctly but not paid, or when the other innocent spouse relief options don’t apply,” Weisberg said.

“When filing, you want to focus on fairness, such as who controlled the money, whether abuse or coercion was involved, and whether paying the tax would cause economic hardship,” he added. “A well-documented narrative is crucial.”

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Relief from liability for tax attributable to an item of community income

You may also qualify for relief from liability for tax attributable to an item of community income. This applies when your tax liability was understated on your joint tax return, and you were unaware.

Whatever the reason, there are common circumstances in which this type of tax forgiveness applies. It applies if you are divorced or separated now, or your spouse may have deserted you.

You must also live in a community state, which includes the following:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

You must meet the general requirements for innocent spouse relief. You must also have been unaware that the item of community income was not included in your gross income.

This includes several types of income.

• Salaries, wages and other compensation your former partner received as an employee
• Income that your former partner received from a trade or business they operated as a sole proprietor
• Your former partner’s distributive share of partnership income
• Income from your former partner’s separate property
• Income belonging to your former partner under community property law that you were not aware of

For this tax relief, you must file Form 8857, just like the other types of innocent spouse relief. This must be done within six months before your former partner’s period of limitations on assessment expires. If the IRS examines your tax return during that six-month period, you must request relief within 30 days of receipt of the IRS letter.

When reviewing your application, the IRS will consider several factors before making a decision:

• The nature of the item of community income
• The amount of the item compared to other income items
• Both parties’ financial situations
• Your educational background and business experience
• If the item of community income was part of a recurring pattern reflected in prior years’ returns

The assessment process has a period of limitation on assessment that generally allows the IRS up to three years that the IRS has from the date you filed the return to assess taxes that you owe.

If the IRS approves your request for tax relief, the outstanding fees and penalties will be separated between you and your former partner, with each party assigned a specific amount to pay.

Injured spouse relief

Injured spouse relief is a lesser-known type of innocent spouse relief. This allows you to receive a refund for your share of payments you made to cover your spouse’s debts.

It applies to those who filed a joint tax return with their spouse, but your refund went to cover your spouse’s overdue debts. If you were unaware of your spouse’s overdue debt, you could receive a refund for your portion of taxes that were paid.

“Injured spouse relief is often confused with innocent spouse relief,” said Weisberg. “However, it specifically applies when a joint refund is used to pay off a debt that belongs solely to one spouse.”

Several types of overdue spousal debt apply.

• Past-due child support
• Debts to federal agencies
• State income tax
• State unemployment compensation debts

You may also be eligible for tax relief if you were married and filed separate returns but lived in a community property state.

If the IRS decides to reduce or waive your tax liability, you will receive a Notice of Offset from either the IRS or the U.S. Treasury's Bureau of the Fiscal Service (BFS).

For this type of tax relief, you must file a different tax form, Form 8379, within three years of the tax return’s date or two years from the date of payment, whichever is later. If you did not file a tax return, you must file your request within two years of the tax payment date.

“When filing, you should focus on documenting your income, withholdings and credits to clarify your share of the refund,” Weisberg advised. “Injured spouse relief protects refunds. It does not eliminate tax liability.”

The assessment process can take up to eight weeks or longer before the IRS makes a final determination. If you lived in a community property state, your refund will be divided accordingly.

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How to apply for innocent spouse relief

If you receive a notice that you have outstanding taxes on your joint tax return, be sure to follow the instructions in your letter.

If you qualify for innocent spouse relief, be sure to request relief immediately, as you only have up to two years after receiving the notice to request relief. Use Form 8857 (Request for Innocent Spouse Relief), which covers innocent spouse relief, including separation of liability, equitable relief and relief from liability for tax attributable to an item of community income. For injured spouse relief, you must file Form 8379.

“When filing for traditional innocent spouse relief, it’s important to explain why it was reasonable not to know, while providing evidence that the spouse had little to no involvement in financial decisions related to the error,” explains Weisberg.

The IRS will then contact your spouse or former spouse to request their participation. Overall, the process generally takes at least six months, but quite possibly longer, depending on your case and the type of relief you are seeking. In the meantime, you should continue to file your normal taxes.

After the IRS makes a decision, you will receive an official letter of determination, as well as any relief for which you are eligible.

How to appeal a decision

If you are unhappy with the final decision, you have the right to file an appeal. This can be for either your personal relief or your spouse’s relief. However, it must be filed within 30 days of the date of your letter of determination. Both spouses or former partners will then be asked to participate in the appeals process.

To file, use Form 12509 (Innocent Spouse Statement of Disagreement). Be sure to mail your form and any supporting documentation directly to the IRS at the address listed on your determination letter; if you mail your documents to the Independent Office of Appeals, it will only delay your case.

If you disagree with the decision for your appeal, you have the option to petition the United States Tax Court. This must be done within 90 days of the date of your final determination letter.

You may also petition the court if the IRS fails to make a final determination within six months of your request filing.