November 2017 JD Supra
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Is your spouse having trouble with the IRS and you didn’t know? JD Supra.

In a joint tax return filing, IRS has the right to assess both spouses that sign a joint income tax return under the penalty of perjury.  This is similar to jointly signing for a loan at a Bank.   The Bank will impose a legal requirement to repay the loan for both spouses in the event of default.  According to IRS Regulations, Taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise from a joint return even if they later divorce.  Joint and several liability means that each taxpayer is legally responsible for the entire liability.  

There are however, instances where a Spouse (or a former Spouse) may be relieved of tax, interest, and penalties resulting from joint tax return filing. 

Three are three types of IRS relief available to married persons who file joint returns.

  • Innocent Spouse Relief
  • Separation of Liability Relief
  • Equitable Relief

The Innocent Spouse Relief and Separation of Liability Relief will NOT be granted by IRS if:

  • Assets were transferred  from one spouse to another  
  • One of the Spouses had actual knowledge of any erroneous items submitted that gave rise to the tax deficiency

If a Spouse does not qualify for Innocent Spouse Relief or Separation of Liability Relief, IRS offers Equitable Relief.  A spouse may still be relieved of responsibility for tax, interest, and penalties through Equitable Relief.  

IRS utilizes a seven factor test for determining whether to grant Equitable Relief:

  1. Marital Status:  If souse is still married, this factor is neutral.  If spouse is no longer married, this factor will weigh in favor of relief of the spouse seeking relief.
  2. Economic Hardship: An economic hardship exists if satisfaction of the tax liability in whole or in part will cause the spouse seeking relief to be unable to pay reasonable basic living expenses.
  3. Knowledge or Reason to Know:  IRS needs to determine whether the spouse seeking relief knew or had reason to know of the item giving rise to the understated tax or deficiency as of the date the joint return (including a joint amended return) was filed, or the date that the spouse reasonably believed the joint return was filed. If the spouse seeking relief did not know and had no reason to know of an item giving rise to an understated tax, this factor will weigh in favor of relief.
  4. Legal Obligation:  IRS needs to determine whether spouse (or former spouse) has a legal obligation to pay the outstanding federal income tax liability arising from a divorce decree or other legally binding agreement.   If a former spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement, this factor will weigh in favor of relief of the spouse seeking relief.
  5. Significant Benefit:   If the spouse (or former spouse) enjoyed the benefit to the detriment of the Spouse seeking the relief, this factor will weigh in favor of relief.
  6. Compliance With Income Tax Laws:  If the spouse seeking relief is compliant for tax years after being divorced from the spouse, this factor will weigh in favor of relief. 
  7. Mental or Physical Health:  IRS will consider whether the spouse seeking relief was in poor physical or mental health at the time the return or returns for which the request for relief relates were filed, at the time the spouse reasonably believed the return or returns were filed and at the time the relief was requested.

Ignorance of a spouse’s financial dealings can bring misfortune to a marriage.  A spouse seeking relief should do so immediately when a spouse or former spouse becomes aware of an unpaid income tax liability.  If a Taxpayer in a marriage filing taxes jointly is a tax cheat, an entire family could be put at risk.  Don’t be a victim of your own making.  Taxpayers in a joint tax return ought to be aware and review what is in the tax filing document.  After all, they are both signing under penalty of perjury.