IRS Helps Some “Innocent Spouses”

When married people sign a joint tax return, they agree to be jointly and individually responsible for the tax and any interest or penalty due on the joint filing, even if they later divorce.  Some spouses simply sign the return without understanding or caring about its content while others sign the return without questions because they fear abuse from their spouse in a relationship marred by domestic violence.  There could be hundreds of other reasons why a spouse signs a joint return without understanding or questioning the potential liability.

Negatives and Positives from the IRS

For most people this is not an issue until the IRS initiates collection activity due to an understated or underpaid income tax liability.  It is when the collection effort commences that a spouse typically starts questioning the content of the tax return and whether relief from liability is possible under the innocent spouse program.  Generally speaking, an innocent spouse is a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability.

There are three types of relief and all, until now, have been subjected to a two-year statute of limitations.  This means that innocent spouse relief is not available if sought more than two years from date the IRS commenced collection activity. However, effective immediately, the IRS has eliminated the two-year statute of limitation on one type of innocent spouse relief – the equitable relief provision – if the collection statute has not expired.

In practice what often occurred is that many individuals who otherwise qualified for equitable innocent spouse relief had no idea the IRS had initiated collection activity because the other spouse had concealed that information.  By the time the spouse discovered the collection activity, the statute of limitations for equitable relief had expired.  The IRS finally realized (or admitted) that this was an injustice.

This new law affects a small, but important, percentage of the innocent spouse requests each year.  It is a move in the right direction to protect the innocent spouse.

What It All Means

As a result, going forward, the IRS will no longer apply the two-year limit to new equitable relief requests or equitable relief requests currently being considered by the agency.  If a request was previously denied solely because of the two-year limit, then it may be necessary to reapply for relief if the collection statute of limitations for the tax years involved has not expired.

This new law is very important in divorce actions.  During a divorce tax returns are typically analyzed by the lawyers and accountants for both sides.  If taxes are due on any return, it is important to review the circumstances surrounding its preparation with your family law attorney and an accountant of your choosing to determine if you can benefit from the new equitable innocent spouse relief.