Highlights and takeaways
- Innocent spouse relief protects you from being responsible for tax debts due to your spouse's errors on a joint return.
- To be eligible, you must file a joint return or live in a community property state, owe additional taxes and penalties due to your spouse's actions, and show that you were unaware of the errors.
- Equitable relief and separation of liability relief are alternatives if you don't qualify for innocent spouse relief.
What is innocent spouse relief?
When you file a joint return with your spouse, you are "jointly and severally liable" for any taxes owed. This means if the IRS finds an error on the return, you're equally responsible for paying the additional tax.
Innocent spouse relief is a provision in the U.S. tax code designed to protect taxpayers from being unfairly burdened by their spouse’s tax mistakes or intentional wrongdoing.
So, how do you qualify for innocent spouse relief? We'll cover that next.
Who qualifies for innocent spouse relief?
IRS has specific eligibility criteria to qualify for innocent spouse relief. You can apply if:
- You filed a joint return with your spouse.
- Your return included understated income due to errors or omissions like unreported income, false deductions, or improperly claimed credits.
- You didn't know about the errors when you signed the return. You have to prove it was reasonable for you not to know about the inaccuracies.
- You live in a community property state. In nine U.S. states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—the IRS can hold you jointly and severally liable for the return even if you don't file jointly.
Let's consider an example. Say Maria and John file a joint return. Unbeknownst to Maria, John has been underreporting his freelance income to receive a large federal tax refund. Maria, who works a full-time job with regular income, trusts John to handle the tax filing, and she signs the return without closely reviewing it. The IRS audits their return a year later and discovers the underreported income. Maria and John are liable for the additional taxes, penalties, and interest.
However, Maria didn't know about John’s underreported income. She might qualify for tax relief because she meets the criteria: they filed a joint return, the understatement was due to John’s actions, and Maria was unaware of the error.
Further reading: 5 Ways to Pay Off IRS Tax Debt
What makes someone ineligible?
Here are some situations where you're ineligible under the innocent spouse rule:
You knew about the errors (or reasonably should have)
You don't qualify for relief if you knew (or should have known) about the errors or omissions when you signed the return.
Returning to the example above, say John reported just $5,000 in freelancing income for the year, but Maria should have known he brought in well over six figures based on their lifestyle. The IRS could argue it's unreasonable for Maria to claim she didn't know about the underreported income and deny her request for relief.
You missed the deadline
There's a two-year statute of limitations for requesting innocent spouse relief. The clock starts ticking when you receive an IRS notice about the error. You're not eligible if you miss this deadline.
You already negotiated with the IRS or went to court over the issue
You're not eligible for relief if:
- You signed an offer in compromise
- You signed a closing agreement covering the same taxes
- You participated in a related court proceeding and didn't ask for relief
In the next section, we’ll cover how to apply.
How to request innocent spouse relief
Applying for innocent spouse relief requires attention to detail and detailed documentation supporting your claim. Here are the steps involved.
Complete IRS Form 8857
Use Form 8857 to apply for relief. The form requires detailed information about:
- You and your spouse
- How involved you were in your finances and tax filings
- Your current financial situation
Part V of the form also asks whether you are (or were) a victim of domestic violence or abuse. You might qualify for relief even if you knew about the errors if you were pressured or threatened to sign the return or didn't challenge the items on the return out of fear.
The form is complex and requires a lot of detailed information, so you might need help from your accountant or attorney to complete it.
Gather supporting documentation
Supporting documents strengthen your claim. Depending on your situation, you might need to include:
- Proof of separation or divorce. If you are no longer married to your spouse, document your divorce or separation.
- Evidence of financial abuse or coercion. If your current or former spouse pressured or misled you into signing the return, provide evidence supporting this, such as police reports, court documents, or statements from third parties.
- Records of tax payments. If you’ve made payments toward the tax debt, include proof of these payments.
- Proof of your financial situation. Documents like bank statements, pay stubs, or other records showing your financial circumstances.
What happens next?
Once you complete Form 8857 and attach the necessary documentation, sign and mail it to the address in the IRS Instructions for Form 8857. If you prefer, you can also fax the form to the IRS using the number listed in the instructions.
After submitting your request, the IRS will review your case. This process can take several months, and the IRS may contact you for additional information or clarification. Respond promptly to any requests to keep your application moving forward.
The IRS must notify your spouse (or former spouse) of your request and ask if they want to participate in the process.
You’ll be relieved of the responsibility for the additional taxes, interest, and penalties if the IRS approves your request. Otherwise, you'll receive a denial letter explaining why and outlining your options for appeal.
Appealing the IRS decision
You have 30 days from the date of the IRS denial letter to request an appeal. An appeal essentially asks the U.S. Tax Court to review your request.
Complete Form 12509 and send it, along with any supporting documentation, to the IRS address listed on your determination letter. Keep in mind, the Tax Court's scope of review is limited to the information the IRS had for its initial decision—it can't consider any newly discovered or previously unavailable evidence.
Once the Tax Court reviews your request for relief, it sends a final determination letter.
Next, we’ll explore other options available to you if you don't qualify for innocent spouse relief.
Other ways to request relief
Innocent spouse relief is perhaps the most well-known form of protection, but the IRS offers other options for people who don't qualify.
- Equitable relief is available if you don't qualify for innocent spouse relief but still face unjust tax liabilities due to your spouse’s actions. This type of relief addresses situations where holding you responsible for the tax debt would be fundamentally unfair, even if you technically don't meet the criteria for the other forms of relief. The IRS considers factors like whether you received any significant benefit from the underreported income, whether you're now divorced or separated, and whether paying the amount due would create an economic hardship.
- Separation of liability is an option if you no longer live with your spouse or former spouse and don't believe you should be fully liable for the tax errors made on a joint return. The IRS divides the tax due between you and your spouse based on your income and assets.
Innocent spouse relief vs. injured spouse relief
Injured spouse relief helps you get back your share of a federal tax refund seized to pay your spouse's debts, including past-due child support, defaulted federal student loans, or state tax debts.
It's easy to confuse innocent spouse relief with injured spouse relief, but these two options serve different purposes. Innocent spouse relief protects one spouse from tax bills due to the other’s errors, while injured spouse relief is about recovering a portion of a joint refund wrongly seized for the other spouse’s debts.
If you believe you might be an injured spouse, you can learn more by visiting the IRS website or consulting a tax professional.
How Bench Can Help
Bench can't directly assist you with applying for innocent spouse relief, but we can help small business owners stay on the IRS's good side by focusing on the foundation of accurate tax filing: good bookkeeping.
When your books are in order, you can:
- Minimize penalties by claiming the correct tax deductions and credits
- Avoid errors that could lead to additional tax debts in the future
- Support your innocent spouse relief claim with well-maintained financial records
Even if you need to address past tax issues, Bench’s clean, organized records can help resolve them.
While innocent spouse relief is a potential solution for dealing with unfair tax liabilities, preventing issues before they arise is the best way to protect yourself and your business.
If you’re ready to take control of your business finances and minimize the risk of tax problems, reach out to Bench to see how we can help you maintain the clean financial records crucial for any successful business.
