Protect Yourself From A Tax-Cheating Husband or Wife
Couples who elect to file a joint tax return get to enjoy many advantages. But when you do so, it must be remembered that both spouses are jointly liable for the taxes owed as well.
This means if your hypothetical husband or wife is a tax cheat, leading to a problem with the IRS, you are equally responsible for his or her doings. That can raise an issue of fairness when one spouse had no knowledge his or her spouse cheated the tax system.
Spouses have three ways to get relief from any taxes due, interest and even penalties that resulted from their tax-cheating spouse improperly reporting income, deductions or tax credits.
For any of these three methods you must file Form 8857 – Request for Innocent Spouse Relief no later than two years after the date on which the IRS first attempted to collect the tax in question. Failure to perform this step in a timely manner can result in the IRS denying your request.
The first method:
- First, the spouse requesting relief must have filed a joint return with the other spouse.
- Second, the understated tax due on the return must be caused by the other spouse's improper reporting of their income or deductions.
- Third, and the most difficult to prove, you must show that when you signed the return, you didn't know and had no reason to know there was an understated tax.
- Finally, when considering all the facts and circumstances, the IRS must believe it would be unfair to hold you liable for the additional tax due on the return in question.
The second method (known as partial relief):
This is granted when the understated tax on a jointly filed return is allocated between the spouses. The spouse seeking relief must be divorced or legally separated from the spouse with whom the joint return was filed or not be a member of the same household during the 12-month period ending on the Form 8857 is filed.
The third method (called the equitable relief provision):
This only works when no relief is available under the first two methods. The IRS has the ability to grant equitable relief to a requesting spouse depending on the facts and circumstances, and concludes it would be inequitable to hold the requesting spouse jointly and severally liable for the additional tax due.
There can have been no transfers of assets between the spouses or to a business that's part of a scheme to defraud the IRS or to avoid tax. Also, the requesting spouse has to prove they did not know the tax return was fraudulent when filed. Finally, the income tax liability for which the spouse is seeking relief must be the result of the other spouse's income and/or deductions.