The term innocent-spouse rule is used to describe tax code that allows an individual to avoid paying taxes if a return was incorrectly reported by their spouse and the individual did not benefit from the failure to pay the taxes owed. The innocent-spouse rule applies if certain conditions are met. Individuals seeking this relief will need to file Form 8857, Request for Innocent Spouse Relief, with the Internal Revenue Service (IRS).
When married couples file a joint income tax return, the law makes both parties responsible for the payment of all taxes owed the federal government. This is referred to as joint and several liability, which applies to not only the taxes owed, but also any penalties the IRS may assess.
This joint and several liability means the IRS has the authority to collect taxes owed from either spouse, even if they divorce in the future. The rule can protect individuals from liabilities created by a dishonest spouse or when one individual fails to pay income taxes with the intention of letting their divorced spouse pay the amount owed. It is possible, under certain conditions, for a spouse to be relieved from the taxes owed, interest due, and the penalties applied to a joint income tax return. Innocent spouse relief is one of three types of help the tax code provides if all of the below conditions can be established:
- Understatement of Tax: the joint return contained an understatement of tax, which is the difference between the amount of tax that should have appeared on the return and the value appearing on the return.
- Erroneous Items: the understatement of tax was due to erroneous items reported by a spouse. This includes deductions, credits, unreported income or any other item that was incorrectly represented on the tax return.
- Knowledge of Understatement: a spouse must be able to establish they had no reason to know, and did not know, an understatement of tax existed when they signed the return.
- Equity: after reviewing all of the facts of the case, the IRS must conclude it would be unfair to hold the spouse liable for the understatement of taxes owed.
The innocent spouse must file Form 8857 with the IRS no more than two years after collection activity begins.
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