Lawrence Lawler: Hi! I am Lawrence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on solving common tax problems. Today we're going to talk about the Innocent Spouse rules.
Innocent Spouse involves three different areas. Included in it are the Innocent Spouse Relief, Separation of Liability, and Equitable Relief. The distinctions between them are as follows:The Innocent Spouse Relief has to do with taxpayers who are married and still together, in other words living together still married and that there is an understatement of tax on their tax return. It does not have to do with underpayment; it has t do with understatement. In other words the tax return figures were incorrect, if you will, or understated.
The second area having to do with Separation of Liability is where those same taxpayers with an understatement on their tax return are not together any longer. They are separated, living apart for more than a year, or divorced. That's the second category of Innocent Spouse treatment.
The third category of Innocent Spouse treatment is called Equitable Relief and it is the only area where underpayment comes into play. Now, it can be underpayment and understatement could both be involved. But in that situation the IRS is going to determine basically is it fair to relieve one spouse of that liability. Was the liability for underpayment and or the understatement related to the other spouse's problem? Obviously the spouse cannot be innocent if they were involved in the problem themselves.
When the IRS is evaluating an Innocent Spouse case, one of the very important considerations is whether or not the taxpayer who is seeking relief benefited from the understatement or underpayment of the taxes. Now, you could have a situation where a spouse, let's say, who doesn't work her - we'll say her being the innocence spouse - the husband works; he has all of the income and things like that, just because she had the bills for household paid by him and so on, doesn't mean she would benefit from the understatement. She could have had all that done with the taxes that were reported. So it's not always a case of whether or not they benefitted being so clear, the IRS will often get into that situation and determine whether or not the spouse who is seeking relief could have lived in the same lifestyle that they did with or without their understatement or underpayment of tax.
And there's one other area that should be considered that has to do with whether or not there has been domestic abuse. In a domestic abuse case, the IRS is very careful first of all not to disclose if the taxpayers are living apart, where the innocent spouse lives and what their address is, what their phone number is, or any of that information. Even though, in most cases, they do contact the other spouse to get information from them to use in making their determination. But in a domestic abuse case they're very careful to guard that taxpayer who is seeking the relief. And at the same time they may deem the tax return that was filed to have been a non-return.
If an individual is for signing a tax return under duress because of domestic abuse, that's not a legal signature. So, it may be that the taxpayers both have to file a tax return to make up for the return that is improper. So, when there's a domestic abuse case, it doesn't involve some additional considerations that you've got to look at.
Moving on from the Innocence Spouse, we're going to look at how you would discharge taxes in bankruptcy, something that many people don't even realize you can do.