Innocent Spouse: Separation of Liability Relief
Under separation-of-liability relief, the IRS separates the tax liability on a married filing jointly return for the understated tax along with interest and penalties between you and your spouse or ex-spouse. If you qualify for this type of innocent spouse relief, you are no longer jointly responsible for the taxes on your joint tax return. Instead, the IRS allocates the tax bill based on your individual liability. The IRS will generally allocate the understatement of tax based on the amount of income and deductions related to your earnings and assets.
You can’t get a refund under this type of relief. If you’ve already paid the tax, there is no way to get it back through this program. However, you may be able to get a refund if you qualify for innocent spouse equitable relief which has different rules.
Eligibility Requirements for Separate Liability Relief (Section 6015)
The IRS has strict rules about this program. Normally, when you sign and file a joint tax return, you are both responsible for the tax due. Even if you get a divorce or one of you dies, you are still responsible for the entire tax bill when you use married filing jointly as your filing status. However, in situations where your spouse underreported the tax by not reporting income, claiming too many deductions or tax credits, or making other errors, the IRS may be willing to give you relief. To help you determine if you might qualify for separation of liability relief, here is an overview of the criteria that the requesting spouse has to meet:
Your Filing Status Was Married Filing Jointly
To be a requesting spouse for this program, you must have filed a joint tax return for the year that you are looking to divide the understatement of tax with your former spouse. If you filed your tax return as married filing separately, you cannot apply for this program. In that situation, your spouse's understatement of tax would only be applied to their separate return. It would not be applied to your return. Note, however, that the rules are different in community property states. Similarly, if you filed your tax return as single or head of household, this program is not for you.
An Understatement of Tax Exists Due to Errors on the Return
To qualify for separation of liability, you (the requesting spouse) must be dealing with an understatement of tax on a married filing jointly tax return that resulted in unpaid taxes. Usually, this happens when the IRS audits the return or discovers that you have unreported income through its document matching system.
This can happen in several different situations. For instance, say that your spouse won $20,000 in a lottery and didn't report it on the return. By not reporting the income, they understated the tax due. Or imagine that your spouse claimed $30,000 in fake business deductions. By reducing their business income on the return, they also understated the tax. Here's another example. Imagine that your spouse bought a property for $100,000 and sold it for $400,000. They should report $300,000 in capital gains on the return, but instead, they say that they bought the property for $250,000, thus reducing their capital gains to $150,000 and understating the tax due. Or imagine that your spouse claimed a child tax credit that they weren't entitled to -- that also understates the tax on the tax return.
You cannot apply for separation of liability if the tax shown on the return was correct but you didn't pay it. This is not an understatement of tax. Instead, this is called an underpayment of tax. If you need relief for underpayment of tax, you should look into equitable relief.
You Are Divorced, Legally Separated, or Widowed -- Innocent Spouse Relief Divorce
At the time you file Form 8857, you must be divorced, legally separated, widowed, or living apart for at least a year. That is why some people refer to this program as innocent spouse relief divorce. The IRS will only let you participate in this type of innocent spouse relief if your marriage is over. The agency is very strict on this rule, and if there are signs that you still have a close romantic relationship, you won't qualify for innocent spouse relief divorce.
Or You Have Not a Been a Member of the Same Household for the Last 12 Months
As indicated above, the only way you can qualify for separation of liability is if your marriage is legally over or if you have been living apart for at least 12 months. What this means is that you cannot be in the same household as the spouse with whom you filed a joint tax return at any time during the last 12 months starting on the day you filed Form 8857 to request relief. For instance, if you're still married and you file for separation of liability relief on Aug 1, 2022, you won't qualify if you lived together at any point from August 1, 2021, to the date you applied.
The IRS considers you part of the same household if:
- You reside with your spouse in the same dwelling. So in other words, if you're living in your marital home but have separate bedrooms, you can't qualify for this type of innocent spouse relief. You must live in separate dwellings.
- You or your spouse are only temporarily absent from the household and it is reasonable to assume one of you will return. For example, if your spouse moved out a year ago to stay with their sick parent in another state, but the household is maintained in anticipation of their return, the IRS considers you to be part of the same household. There are many situations where the spouse is likely to return. For example, temporary absences can include things like prison time, sickness, military service, education, vacation, or business.
If you have been living apart but it's been less than a year or you're worried that the IRS will claim you share a household for some other reason, you may want to start the divorce process before you apply for innocent spouse relief divorce. Then, you can rely on the divorce rule, and you don't have to worry about this 12-month requirement.
You Had No Actual Knowledge of the Issues That Lead to the Understatement of Tax
To recap, for innocent spouse relief based on separation of liability, you must have filed a joint return, there must have been an understatement of tax due to your spouse/ex-spouse's actions, and your marriage must be over or you must be living apart. However, reporting your ex-spouse to the IRS and meeting the above requirements does not mean that you automatically get relief. You also must have no actual knowledge of the issue that led to the understatement of tax. This is where a lot of innocent spouse relief divorce claims get rejected.
The IRS will look at different factors as to whether you knew about the error on the joint tax return when you signed it. Actual knowledge can be interpreted in many different ways. If any of the following statements apply, the IRS will claim that you had actual knowledge:
- You know that your spouse or former spouse had unreported income.
- You know that a deduction or credit wasn't allowed.
- You know that your spouse claimed an expense that they didn't incur or that they inflated the amount of an expense.
To help you get a sense of whether or not you might qualify, let's look at a few examples. Say that you knew your spouse earned $20,000 that wasn't reported on the tax return. When the IRS audits your return and sends you a bill for the tax, penalties, and interest on the unreported income, you report your ex-spouse to the IRS and say that it was all their income. However, because you knew about the income, you don't qualify for this type of relief. You remain liable. In contrast, imagine your spouse hid that money from you and you had no idea. Then, you might qualify for separation of liability.
Here's another example. Imagine that your spouse claims a business deduction for a regulatory fine their business paid. Fines are not deductible as business expenses, and you're aware of that fact because it was covered in a business course that you recently took at the community college. In this case, you can argue that your ex-spouse was responsible because they were the one who put the deduction on the return. However, because you knew it was wrong and signed anyway, you are still responsible. On the other hand, if you didn't know about this rule and your spouse convinced you that their actions were right, you have a stronger case.
Now let's say that your spouse rented an office for their business. They paid $1,000 per month or $12,000 in annual rent for the office, but throughout the year, they told you that they were actually paying $2,000 in monthly rent. They were taking the extra money and spending it on themselves. When they file the joint return, they claim $24,000 in business rent. You didn't have actual knowledge of the issue, so you might qualify for separation of liability relief. Again, however, if you knew about the issue, you won't qualify for relief.
When assessing whether or not you had actual knowledge, the IRS will also consider whether or not you refused or avoided learning about the item to shield yourself from the liability. To give you an example, imagine that your spouse won $50,000 at a rodeo. They didn't tell you about the prize money. However, you knew they competed in the rodeo, and you knew that they bought the family an expensive boat not long after the rodeo. You don't want to deal with the tax implications so you just don't ask questions. In this situation, although you didn't have actual knowledge of the winnings, you should have noticed that something was going on. The IRS will likely claim that you don't qualify for this type of relief.
However, these situations can get complicated. The IRS says that they can't infer actual knowledge "when you merely had a reason to know of the erroneous item" but it also says that you don't need to know "the source of an erroneous item to establish that you had actual knowledge of the item itself." Either of those statements may apply to the above scenario. The IRS could approve your claim because you didn't have actual knowledge. You merely had a reason to know about the income. On the other hand, the IRS could deny your claim because the agency could claim that you obviously noticed the extra income when your spouse bought the boat even though you weren't aware of the source of the income. Because innocent spouse relief divorce claims are so complicated, you should work with a tax professional who understands this program inside and out.
Domestic Abuse Exceptions for Actual Knowledge
If you had actual knowledge of the understatement of tax but you were in an abusive relationship, the IRS may grant you an exception. This applies when you know that your spouse didn't report all of their income or took other actions to erroneously reduce the tax due, but you signed under duress. In this situation, you had to sign the return because you were afraid of what would happen if you didn't. The IRS doesn't consider your return to be jointly filed in this case. However, you may have to file a separate return to report your income.
When you file for innocent spouse relief divorce, there is a box that you can tick on the form to indicate that abuse was involved. This creates a mark on your file, and anyone who speaks to you from the IRS is instructed to be sensitive to your situation. However, you can also note that you don't want your file marked as abuse. If so, you can still explain how the abuse affected your situation. Your file just won't be marked to alert the agents who deal with your case.
Reasons the IRS Denies Separation of Liability Requests
As explained above, IRS innocent spouse is a complex program, and you need to make your request carefully if you want to get relief. The IRS will not grant separation of liability relief in any of the following situations:
- Your spouse or ex-spouse transferred property to you to avoid taxes.
- You and your spouse or ex-spouse transferred assets to each other as part of a fraudulent scheme. The fraud doesn’t have to relate to the IRS. It can also be to defraud a creditor, a business partner, or another party.
- The IRS believes that you knew about the errors on the return when you signed the return. If you had actual knowledge of only part of an erroneous item, the IRS will not grant separation of liability relief for that portion of the item.
To give you an example, imagine that you apply for innocent spouse relief divorce, and you report to the IRS that your ex-spouse was solely responsible for the understated income. When reviewing your application, the IRS notices that your spouse transferred a car and a boat to you and those assets were likely to have been bought with the unpaid tax money. The IRS may deny your claim. However, the asset transfer doesn't necessarily even have to be linked to the underreported tax.
Say that you apply for innocent spouse relief to get rid of a tax liability due to your ex-spouse. However, your ex-spouse won't be able to pay the tax either because they have no equity in any assets. They have given everything to you. In this situation, the IRS may deny your request because the way you transferred assets is shielding your spouse from the tax liability.
Partial Separation of Liability
Normally, when the IRS grants you separation of liability, it only holds you responsible for the understatement of tax that was due to you, but it can also hold you responsible for any of portion of the understatement that you had knowledge about. Here's a very basic example. Say that you knew your spouse didn't report $5,000 in income, but in reality, they didn't report $50,000 in income. You had no actual knowledge of the extra $45,000 in unreported income.
In this type of situation, the IRS can hold you jointly and severally liable for the tax, interest, and penalties related to the unreported $5,000, but it won't hold you responsible for the tax, interest, and penalties due to the other $45,000.
Considerations When Reporting Your Ex-Spouse to the IRS
It can sometimes be scary to report your ex-spouse to the IRS, especially in situations where abuse was involved. When you request innocent spouse relief, the IRS must notify the other party. This request affects their tax liability, and they have a legal right to know. However, the IRS won't give your ex-spouse any information about your address or contact details. However, if your request is denied and you appeal, your contact details may become public if you take your case to Tax Court. If you're worried about possible retaliation from reporting an ex-spouse to the IRS, you may want to consult with a tax attorney before you do anything.
Get Help Applying for Innocent Spouse Relief Divorce
When in doubt, it is always a good idea to consult with a licensed tax professional. If you are looking for a free consultation regarding your tax situation, use the search below to browse top-rated tax professionals from your local area. They can help you apply for innocent spouse relief or other IRS programs. When you select a local tax pro, they can also help you apply for state relief programs. Note that not all states offer innocent spouse relief, and if they do, they may have different rules than the IRS. That's why it can be critical to work with someone who understands and has experience with the rules in your state.
When searching for a tax pro on TaxCure, be sure to select "Innocent Spouse Relief" as a solution to view the professionals who specialize in these filings. You may also want to search for pros who have experience with your state revenue agency. Once you have a list of results, you can review their ratings and experience to find the best fit for your situation.