IRS may permanently extend filing deadline for innocent spouse relief

In a marriage, it is common that one person handles most of the finances. One spouse may work in accounting or deal with the books of a small business and find it easy to track the family balance sheet. At tax time, it is easy to sign the joint return trusting the information is accurate.

Unfortunately, if your spouse understated the family income or failed to pay the taxes due, you are both liable for the tax, interest and penalties. If you divorce, but an audit discovers unpaid taxes during the marriage, you both are jointly and severally liable. This means that if your ex-spouse fails to make any payments, the IRS can try to collect the whole amount from you.

Innocent spouse relief might be available when a spouse or former spouse did not report all income or claimed an improper credit or deduction. The IRS has ten years to collect on a debt, but the timeframe for a spouse to seek relief was much shorter under a prior rule.

Background behind proposed permanent rule

Recently, the IRS announced that it would make permanent an extension to the filing period for innocent spouse relief. Following many court challenges to the previous two-year deadline, the IRS announced a general extension in 2011. Now a proposed regulation would make the extension permanent. The regulation will be retroactive to July 25, 2011.

The longer timeline would apply to all innocent spouse relief applications filed on or after the retroactive date. This could mean that a taxpayer might qualify for relief, if a previous denial was because of the two-year limit. Reapplying with an IRS Form 8857 would likely be necessary.

When can you take advantage of innocent spouse relief?

To qualify for relief you must meet the following three conditions:

  • The tax deficiency was caused by a spouse's erroneous item (this could include omitted income, an improper credit, deduction or property basis reported on a joint return);
  • You had no actual knowledge or reason to know of the understatement of tax when you signed the tax return; and
  • It would not be fair to hold you responsible for the tax bill.

The IRS considers your individual circumstances when reviewing an application. When analyzing whether you had reason to know, the IRS could review your financial situation, as well as education and business background. The agency might also ask why you failed to question the accuracy of the return.

In determining if it is unfair to hold you liable for the taxes, the agency will consider whether your spouse deserted you or if you later divorced or separated. Another question will be whether you directly or indirectly benefited from the understated taxes. If the relationship was abusive, either physical or psychological, that may also be taken into consideration.

When a surprise tax bill arrives, contact an experienced tax attorney. If you relied on a spouse to handle the taxes there may be relief available.