A Guide to the Innocent Spouse Relief Program

divorced woman stressed over her ex's tax debt

Going through a divorce or losing a spouse is a horrible experience to deal with. The emotional toll on any person is more than enough to deal with let alone the task of dealing with assets and liabilities. This situation becomes much worse if one of those liabilities is IRS tax debt

Assets and other liabilities can be dealt with and dictated through a state divorce decree. IRS tax debt is a federal debt and federal law supersedes state law. So, in a divorce decree, you can include IRS tax debt, but this does not stop the IRS from coming after you. Having the debt in a decree will allow you to go after the spouse through the state courts though if the IRS collects against you. 

The IRS offers a program that can possibly provide a spouse some sort of relief from tax debt when it is coming from a spouse’s or ex’s income. This program is called Innocent Spouse Relief.

 

What Is the Innocent Spouse Relief Program?

Innocent Spouse Relief is a program where 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 can only be collected from your spouse or former spouse. 

However, you are still jointly responsible for any tax, interest, or penalties that do not qualify for relief. Innocent spouse relief only applies to individual income or self-employment taxes. These programs apply to tax debts from a spouse not reporting or incorrectly reporting income or improperly claimed tax deductions or credits.

 

How Do I Qualify For Innocent Spouse Relief?

To qualify for this program, you would need to be able to prove that you did not know or had no reason to know about the liability. This may be provable in situations of unreported income, or an incorrect tax deduction, credit, or basis claimed by your spouse. You would seek Innocent Spouse relief from the IRS when you become aware of the tax liability and believe that the tax debt is not yours. In most cases, the taxpayers who are approved for this program are no longer married.

 

The Injured Spouse Allocation Program

There is another program with a similar name that brings a lot of confusion as to which type of situation leads to approval. A lot of people confuse Innocent Spouse with Injured Spouse. These are two separate programs. 

The Injured Spouse Allocation program is a program available for spouses in jeopardy of losing a refund towards a spouse’s tax debt. If you are entitled to Injured Spouse relief, you may be able to get your share of the refund released to you.  

Despite their names, these programs have nothing to do with situations when a person is a victim of spousal abuse.

 

Qualifications for Innocent Spouse Relief

The IRS requires that a taxpayer must meet the following conditions to qualify for Innocent Spouse Relief:

  • You filed a joint return which has an understatement of tax due to an erroneous item, defined below, of your spouse or former spouse.
  • You establish that 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 below.
  • Considering all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. See indications of unfairness for Innocent Spouse Relief below.
  • You and your spouse have not transferred the property to each other 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.

If you knew about the erroneous item that belongs to your spouse or former spouse, the Innocent Spouse program does not apply to any part of the understatement of tax due to that item. If you had reason to know about the erroneous item, then you would also not qualify. When determining this the IRS will take into consideration a few different factors.

  • The nature of the erroneous item and the amount of the erroneous item relative to other items
  • The financial situation of you and your spouse
  • Your educational background
  • The extent of your participation in the activity that resulted in the error.
  • Whether you failed to ask, at or before the time the return was signed about items on the return or omitted from the return that a reasonable person would question.
  • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns.

 

What Is Not Covered Through the Innocent Spouse Relief Program?

Unfortunately, the Innocent Spouse Program does not cover every type of tax debt that may result from errors on a tax return. There are many types of taxes that do not qualify for the Innocent Spouse Program which include any tax debts that come from individual shared responsibility payments, business taxes, trust fund recovery penalties for employment taxes, household employment taxes, and any other taxes deemed outside of your relief.

 

Other IRS Tax Relief Programs Available

If you do not meet these parameters there are other programs available for situations similar. One of these programs does not relieve of the tax debt but at least you would only be responsible to pay your own share. This program is called Separation of Liability Relief. To qualify for this program, you must be divorced, legally separated, or widowed to qualify and cannot have lived with the person for the 12 months prior to your request for relief.

If you do not qualify for the Innocent Spouse Program, you may qualify for another program called the Equitable Relief Program. As you have seen, the Innocent Spouse program is very specific on what tax debt can be forgiven through the program. The Equitable Relief Program is the only program where you can seek relief from underpayment of tax debt. This would be a situation when mistakes were not made and your spouse filed their taxes, knew that they owed a tax debt but failed to pay the debt. 

To qualify for the Equitable Relief Program, you would need to prove to the IRS that it is unfair to hold you liable for the debt. This is the program that a victim of spousal abuse could utilize to separate themselves from the ex-spouse’s liability. 

 

How to Apply for the Innocent Spouse Relief Program

To seek Innocent Spouse Relief, you should complete the IRS Form 8857, Request for Innocent Spouse Relief. The IRS will accept a written statement as well as long as it provides the same information the form requires.  You should fill out this form as soon as you become aware of a tax liability for which you feel you should not be held responsible. 

Generally, you must fill out this form and submit it no later than two years after the IRS’s 1st attempt to collect a tax debt. Do not file your Form 8857 with your tax return or submit it to tax court. You may mail it to the IRS directly at:

Internal Revenue Service
PO Box 120053
Covington, KY 41012

Or you may fax the form and attachments to 855-233-8558.

Whether you mail or fax your application, be aware that the IRS will contact your spouse. Unfortunately, there are no exceptions to this rule and the spouse will be informed of the request and the preliminary and final determinations regarding the requested tax relief

If determined that you are not liable, the IRS will collect the tax, interest, and penalties from your spouse or ex. If you have already paid some or all the tax debt, the IRS will refund only the tax payments that you made with your own money. If any part of the tax debt does not qualify for the program, then you will still be held liable for that portion of the tax debt.

In conclusion, when dealing with this type of situation it is especially important to understand not only the qualifications of the programs to see if this is something you could utilize but also how the process of applying for a program works. In a situation like this, it is especially important to hire a true tax professional. An Enrolled Agent or CPA are both tax professionals that hold the licensing that requires knowledge of these programs and how to assist the taxpayer. If this is not the right program for you, having such a tax professional in your corner is a must.

You do have a lot of rights when it comes to owing taxes. Having someone who not only knows these rights but can help you enforce them is especially important. As long as you are a compliant taxpayer, meaning you have filed all required years, there is likely a program that meets your financial situation.

 

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

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