What is an Innocent Spouse?

There have been whispers of innocent spouse circulating throughout the tax world. But what exactly is an innocent spouse? An innocent spouse is an individual who filed a joint return with their spouse, but the spouse either deliberately or unintentionally underreported their income on a tax return. Due to the underreporting being discovered through an IRS assessment, tax debt is accrued. Let’s review some key items regarding innocent spouse and possible relief.

Eligibility is Key

Several factors qualify or disqualify an individual as an innocent spouse. A taxpayer may be eligible if:

• The tax return was filed jointly.
• Resides in a community property state.
• Taxes were understated due to errors on the tax return.
• The taxpayer was unaware of the errors.

The errors that result in an underreporting or understatement include:

• Not all income was reported, or income was under-reported.
• Deductions or credits claimed were incorrectly claimed.
• Values for assets are reported incorrectly.

As with all matters with the IRS, a big asterisk could prevent a spouse from qualifying for this relief: having knowledge of the errors committed on the return. The knowledge could include knowing unreported income was received, or income was underreported, the credits and deductions were not accurate, and expenses claimed were incorrect. However, it is essential to know that a victim of domestic abuse is exempt from the knowledge of errors disqualifier.

The other factors that disqualify an individual from being considered an innocent spouse are:

• The taxpayer signed a closing agreement with the IRS for tax periods with the issue.
• The taxpayer signed an Offer in Compromise with the IRS.
• A court made a final determination denying relief from the tax issue.
• The taxpayer participated in a related court proceeding and didn’t request relief from the tax debt.

Let’s review some examples.

Example #1

A husband and wife file their tax returns Married Filing Joint. The husband is a sole proprietor, and the wife does not work, instead focusing on tending to their children and ailing parents. At the end of the year, the husband works with an accountant to complete and file the tax returns. The husband does not include all income received for the year from his business. After the tax return is filed, it is discovered by the IRS that not all income received by the husband was reported. Upon discovery, the IRS assesses additional tax due on the jointly filed income tax return. If the wife did not know her husband’s income was not fully reported, she could qualify as an innocent spouse.

Example #2

A husband and wife, who both receive wages from an employer, file their annual income tax return Married Filing Joint. Historically, the wife has always pulled together the information required to complete the tax return and works with a Tax Return Preparer. The wife claims a non-qualifying dependent to increase the potential refund amount. As the husband has only ever provided his Form W-2 and did not know one of the dependents claimed did not qualify, he could be considered an innocent spouse.

Example #3

A husband and wife (see the central theme here?) are both sole proprietors operating two separate businesses. The husband is meticulous in his record keeping, ensuring accuracy at the end of each year. The wife does not keep records as meticulously as her husband and, at the end of the year, intentionally changes some of the totals for her expenses. This results in an error in deductions claimed, causing the taxable income to be underreported; thus, a tax debt accrues. As the husband was unaware of the incorrect deductions, he could qualify as an innocent spouse.

So, is there relief in being an innocent spouse?

In each example outlined above, these errors, intentional or not, resulted in a tax debt. As many people know, a tax debt includes penalties and interest that inflate the total that must be paid back. But is it fair that the spouse that did not have knowledge of the error be responsible for the tax debt? No, and the IRS concurs. Therefore, Innocent Spouse Relief was implemented into tax law.

Once it is determined that an individual qualifies as an innocent spouse, relief can be requested. This relief MUST be requested within two years of receiving the notice issued by the IRS informing of the tax debt discovered during their examination of a tax return or returns. The process can be lengthy as the IRS must perform their due diligence in confirming that a taxpayer qualifies as an innocent spouse and determines the relief granted. If the determination is unfavorable for the taxpayer, appeal rights are granted.

If you believe you or your client are an innocent spouse and would like to pursue relief, reach out to the Golden Lion Tax Solutions team. With over 23 years of experience in the tax debt resolution industry, they have the knowledge and expertise necessary to decide if the taxpayer could qualify and the ability to push through the process in the most efficient manner possible.

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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.

For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.