By Jason Alderman
I’ll wager that when most brides and grooms utter the phrase, “For better or for worse,” the “worse” they’re imagining probably involves situations like getting laid off or a prolonged family illness – not being the victim of tax fraud perpetrated by a current or former spouse.
Married couples typically file joint tax returns because it lets them take advantage of certain tax credits and other benefits not available if they file separately. However, one potential drawback is that you’re each responsible, jointly and individually, for any taxes, interest and penalties due on returns filed while you’re married, even if you later divorce.
So what happens if your spouse or ex-spouse – either unintentionally or deliberately – underreported income, overstated deductions, didn’t report taxable IRA distributions or any of a host of other sins in the eyes of the IRS? Well, you could be left holding the bag, even if those things occurred without your knowledge or understanding.
That’s why each year tens of thousands of people file for “Innocent Spouse Relief” with the IRS. Unfortunately, it can be very difficult to prove your case and many are denied. Plus, until recently, the law mandated that in all cases you must have applied for relief within two years of the IRS’ first collection activity or your claim would be disqualified.
But in one respect at least, the IRS has eased the burden of proof: Last year, the agency eliminated the two-year requirement for taxpayers filing for “equitable relief,” a category open to taxpayers who don’t meet the strict requirements of other provisions in the Innocent Spouse law.
The IRS’ change of policy recognized that in some cases, the victimized spouse doesn’t even become aware of the transgression until long after the fact. Often it’s because the offending spouse has concealed the information or hid or did not forward mailed underpayment notifications from the IRS – or, in the case of domestic abuse, the victim was afraid to come forward.
There are three categories of relief you may seek: Innocent spouse relief; separation of liability and equitable relief. The differences between them (including eligibility, deadlines and statutes of limitations) are complicated, so read “Tax Information for Innocent Spouses” at www.irs.gov for details.
To apply for Innocent Spouse Relief, you’ll need to file IRS Form 8857; however, one form will work for multiple years’ filings. Don’t delay filing just because you don’t have all required supporting documentation, since in some cases the two-year filing deadline does still apply.
In making its ruling, the IRS will consider factors such as your educational and business experience, the couple’s financial situation and the extent of your participation in the action that resulted in the erroneous item. The IRS will deny a claim if they believe you benefitted from the tax avoidance.
Taxpayers whose past request for equitable relief was denied solely because of the two-year limit may reapply using IRS Form 8857 if the collection statute of limitations for the tax years involved has not expired.
Visit “Tax Information for Innocent Spouses” at www.irs.gov for details on the various types of relief available, eligibility qualifications, statutes of limitations and more.
I hope that your marital “worst case” never goes past a minor spat or two, but it’s good to know there is relief available for such terrible situations.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.