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Getting the IRS Facts

[Staff Writers]

Married physicians and other couples generally choose to file a joint tax return because they get the best tax breaks from that filing status; despite elimination of the “marriage penalty” several years ago.  

However, joint filing has its downside. One spouse can be held fully liable for all the tax due—even if all of the income was attributable to the other spouse. What’s more a divorce does not limit a spouse’s liability—even if the decree requires the other spouse to pay the taxes.

IRS Reform Act

There is, however, a way out: The taxpayer can apply to the IRS for innocent spouse relief. What’s more, the IRS Reform Act, as previously discussed in the Executive-Post, liberalized the rules for obtaining relief.

Get the FAQs

Some time ago, the IRS released answers to frequently asked questions [FAQs] about the innocent spouse rules. The IRS release spells out policies and procedures that apply to innocent spouse requests.

Q. What kind of relief is available?

A. There are three kinds of relief: (1) innocent spouse relief; (2) separation of liability; and (3) equitable relief. Each category has different requirements and procedures.

Q. What are the rules for innocent spouse relief?

A. To qualify for innocent spouse relief, a taxpayer must meet all of the following conditions:

• The taxpayer filed a joint return with an understatement of tax.

• The understatement was due to erroneous items of the other spouse.

• At the time the return was signed, the taxpayer did not know and had no reason to know of the understatement of tax.

• Taking into account all of the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement.

Q. What are the rules for separation of liability?

A. Under this type of relief, the joint return understatement is divided between the spouses, according to their earnings and assets. To qualify for separate liability, the taxpayer must meet either of the following requirements at the time of the request:

1. The taxpayer is no longer married to, or is legally separated from, the spouse with whom the joint return is filed. For this purpose, a taxpayer is no longer married if he or she is widowed.

2. The taxpayer was not a member of the same household as the spouse at any time during the 12-month period ending on the date of the request. However, a request for separation of liability may be denied if the taxpayer or spouse transferred assets to avoid paying tax or the taxpayer had knowledge of any of the incorrect items when the joint return was filed.

Q. Will the IRS grant a request for separation of liability if a husband and wife are still married, but have been separated for at least 12 months for an involuntary reason such as incarceration or military duty?

A. Separation of liability applies to all taxpayers who have been living apart for 12 months or more preceding the filing of a claim.

Q. What are the rules for equitable relief?

A. Equitable relief is available only if a taxpayer does not qualify for innocent spouse relief or separation of liability. The IRS must determine that it would be unfair to hold the taxpayer liable, taking into account all the facts and circumstances. Unlike innocent spouse relief or separation of liability, equitable relief may apply to an underpayment of tax properly shown on a return.

Q. What factors will the IRS consider in deciding whether to grant equitable relief?

A. The following factors will be considered:

• Current marital status

• Abuse experienced during the marriage

• The taxpayer’s reasonable belief, at the time the return was signed, that the tax was going to be paid

• Current financial hardship

• Underpayment or understatement attributable to the nonrequesting spouse

• Lack of significant benefit received by the requesting spouse.

Bear in mind, however, that this list is not all-inclusive.

Q. What if one spouse forged the other’s name on a joint return? Does the nonsigning spouse qualify for relief?

A. Relief is available, but not under the innocent spouse rules. If a spouse can prove that his or her signature was forged, and there was no tacit consent to the signing, the return is invalid for that spouse.

Q. If a spouse signs an examination report that lists omissions of income, does that mean he or she had knowledge of the items giving rise to the deficiency?

A. No. The innocent spouse rules make it clear that knowledge has to do with what was known at the time the return was signed.

Q. How do state community property laws affect a taxpayer’s ability to qualify for relief?

A. Community property laws are not taken into account by the IRS for purposes of any request for relief from liability.

Q. Do the new relief rules apply to any outstanding tax liability?

A. The rules apply to (1) unpaid balances as of July 22, 1998, and (2) liabilities arising after July 22, 1998, and as amended.

Q. How does a taxpayer request relief?

A. The taxpayer should file Form 8857, Request for Innocent Spouse Relief, along with a statement providing additional information for the IRS to consider. One form can cover multiple years. The IRS will automatically consider all three types of relief when processing a request.

Assessment

It is not know how many medical professionals are familiar with the above; but it is likely very few. That’s why the sage advice of a CPA or tax attorney is always helpful.

Conclusion

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Filed under: Accounting, Taxation | Tagged: innocent spouse rules, IRS | 1 Comment »