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When is Innocent Spouse tax relief applicable?

| Feb 7, 2019 | Tax Controversies |

Filings a joint tax return assumes that both parties are aware and responsible for their tax liabilities. But in matters of marriage, things are rarely cut and dried.

That’s why the IRS allows Innocent Spouse Relief. At its simplest, it means that one spouse (or former spouse) was reasonably unaware of a tax burden incurred by the other spouse.

The devil is in the details

According to the IRS, Innocent Spouse Relief is applicable when one filer improperly reports or omits an item on a joint tax return.

To qualify, the IRS says you must meet these conditions:

  • You filed a joint return with an understatement of tax by your current or former spouse
  • At the time you signed the return, you had no reason to know about the understatement
  • It would be unfair to hold you accountable for the understatement
  • You and your current or former spouse are not taking part in a fraudulent scheme.

What a reasonable person would know

An understatement can be either unreported income or an improper deduction or credit. Innocent Spouse Relief doesn’t apply if you knew of the understatement or if a reasonable person would have known.

To determine if you had a reason to know, the IRS will take into account:

  • The nature and amount of the erroneous or omitted item
  • Your financial situation, education and business experience
  • Your involvement in the activity that resulted in the erroneous or omitted item
  • Whether a reasonable person would have asked about the item when the tax return was signed
  • Whether the erroneous or omitted item was a departure from previous tax returns.

The IRS will also determine if partial relief is warranted. It gives the example of a spouse who knew her ex-spouse did not report $5,000 in gambling winnings. It was later revealed that the ex-spouse actually won $25,000. You can be eligible for partial relief if you can establish that you had no way of knowing about the additional $20,000 in winnings.