An article in Smart Money Magazine entitled Your Tax-Cheating Spouse May Cost You, considered the benefits of married couples filing joint tax returns. It also discussed what you may want to consider if your spouse was not on the level with “your” previous tax returns. Filing separately from your spouse could prevent IRS problems from occurring in the first place, but in each unique situation this may not be possible. However, you do have options. Below are some key points to consider when deciding if you should file joint tax returns with your spouse:
Joint and Several Responsibility
Married couples decide to file jointly to take advantage of lower tax rates and specific tax credits that result in substantially less tax liability. However, any past filing errors such as tax underpayments or understatements can and often return to haunt a couple whether married or divorced. This is called joint and several responsibility.
The IRS views married couples filing jointly as individuals and holds both taxpayers responsible for any tax debt. The IRS will attempt to collect from both responsible parties back taxes, penalties, and interest even if the couple has since divorced; the IRS is not bound by a divorce decree. For better or worse, a spouse inherits their partner’s tax history (when filing jointly) so should the marital bliss fade, the couple’s tax liability will not. Knowing this should help you make an informed decision should there be doubts as to the credibility of your spouse’s past and current tax dealings.
File Separate Taxes
Filing separate tax returns may mean missing out on lower tax rates and tax credits, but in the long run it may do more to save your marriage, finances and help to keep the IRS at bay. Filing a separate return referred to as married filing separate (MFS) means you will only be responsible for any unpaid back taxes reported on your separate return. What your spouse reports (or doesn’t) on theirs will not affect you.
Innocent Spouse Relief
If you were unaware of your spouse’s financial mishandlings at the time you signed your joint return and now have the IRS is coming after you for the unpaid taxes, you can request Innocent Spouse Relief. If you qualify, this program could relieve you of the unpaid tax, interest and penalties on that return.
The filing spouse must meet the following guidelines:
- The innocent spouse filed a joint tax return with an understatement of tax.
- The tax discrepancy was due to erroneous actions from your spouse.
- You did not know of the erroneous actions by your spouse when you signed the return.
- You feel it would be unfair to hold you responsible for the understated tax.
- You apply for innocent spouse relief by filing IRS Form 8857.
Note: New IRS provisions state that requesting spouses are no longer required to file an innocent spouse relief application within two years after first action to collect the joint tax liability. (A recent blog post IRS Guidelines Helps More Innocent Spouses highlights these current changes.)
Equitable Relief Request
Equitable Relief protection examines all the facts and circumstances of whether it’s unjust to hold you liable for the taxes and penalties on the reported income your spouse claimed were paid.
Some of the factors to qualify include:
- The taxes owed were your spouse’s or ex-spouses.
- There is an understated or underpaid tax.
- You would suffer financial hardship if you had to pay the tax.
- You would not be able to pay for basic living expense such as food, shelter and clothing.
- You apply for equitable relief by filing the aforementioned Form 8857
The Smart Money article reminds us that while these programs provide IRS tax relief to those that really need it, there are definitely some shortcomings to them. In particular:
- After filing Form 8857, the law states the IRS must notify your spouse or ex-spouse of your seeking innocent spouse or equitable relief even if you are a victim of spousal abuse.
- The IRS is also legally bound to notify your spouse or ex-spouse of the outcome of your request for innocent spouse or equitable relief. If your request is approved, your spouse or ex-spouse will now be required to pay the entire back tax debt instead of you.
If you have any doubts about your spouse’s tax integrity, filing a separate return; married filing separate (MFS) will suit you best. Don’t rely on innocent spouse or equitable relief programs to settle past spousal tax issues. These cases are complex and intimidating and the burden of proof rests on the taxpayer to prove their case, making winning them very difficult. If you are considering an innocent spouse defense you will want to hire expert advice from a tax attorney or certified tax resolution specialist who will help file for innocent spouse protection and increase your chances for tax relief.
More Tax Help, IRS News and Tax Relief Tips:
- Ask the Certified Tax Specialist – Small Business Back Taxes
- Treasury Proposes Multilateral Agreement for Offshore Compliance
- Delinquent and Unfiled Tax Returns? 8 Steps to Resolving Them
- IRS Bankruptcy-Five Tax Relief Options for Back Taxes
- Swiss Bank Wegelin Avoids Court Appearance
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