To understand the IRS spousal tax and debt relief plans, a couple need not be divorced for either spouse to seek tax relief. There are three different ways by which a single spouse may try to reduce his or her tax debt. They include:
- Innocent spouse relief,
- Injured spouse relief,
- Equitable spouse relief.
We will discuss each item in detail below:
Even the most successful of couples do not always communicate clearly about their finances. When it is time to file taxes, there may be confusion and miscommunication between partners. A situation that harms one spouse who is considered “innocent” often arises because of remarriage, separate assets of the spouses, one spouse starting a business after years of marriage, divorce, separation, and marriage later in life.
What constitutes the “innocent spouse relief?”
Simply owing taxes does not make one “innocent” and is not grounds for tax relief. Instead, there must have been an understatement of taxes due based on some “mistaken item”, however not under the discretion of the innocent spouse. The innocent spouse did not know and had no reason to know about the error.
This ignorance is not presumed by the law. The innocent spouse must file for relief within two years of the IRS trying to collect the misrepresented tax. There are a number of factors the IRS will consider to determine whether or not a spouse is innocent:
- Is the debt tied to the non-innocent spouse?
- Did the following year’s tax returns show compliance?
- Is there a legal agreement regarding the tax debt, especially in a divorce decree?
- Is the couple still married?
- Was there abuse in the marriage?
- Is there an undue hardship to the innocent spouse?
- Is there a significant benefit to the innocent spouse if relief is granted?
It is entirely possible that one spouse may see his or her refund seized to pay the prior tax debts, child support or even student loan debt of the other spouse. In order to retain fairness in this situation, the IRS will give the “non-innocent” spouse the opportunity to explain the innocence of his or her partner.
After arguing the case as an “innocent spouse”, the IRS will look automatically at the two other grounds for relief. This review is automatic. Usually an innocent spouse gets the benefit he or she would have gotten if the spouses had filed separately. In other words, the mistake is no longer a shared responsibility, but becomes the
responsibility of the spouse who made the error.