I regularly represent people in the Irvine, Mission Viejo and Laguna Niguel areas of California who are liable for federal taxes because their spouses mistakenly or intentionally entered inaccurate information on joint returns — or failed to report information that should have been entered — that left my clients surprised to be holding the bag for the tax bill through no fault of their own. The IRS allows tax relief to the “innocent spouse” in some of these circumstances.
(Because California is a community property state, even if a joint return was not filed, there could be some relief available.)
When a joint tax return is signed, both spouses are “jointly and severally” liable for any associated tax. This means that each of them individually is legally liable for the entire tax bill (including interest and penalties), not just half or part of it.
Divorce does not affect joint and several liability for a return signed during the marriage. Even if the parties enter into a marital settlement agreement that only one of them will have tax liability for joint returns signed during the marriage, the IRS still considers each of them fully liable.
Three bases for relief from tax liability may be available, depending on the situation.
Innocent spouse relief
When one spouse enters an “erroneous item” on a joint return, unbeknownst to the other, and that item causes the tax owed to be understated, the innocent spouse may be able to get relief from liability for the tax (which is actually higher than the amount reported on the return because of the erroneous item).
The innocent spouse must show that he or she did not know (or had no reason to know) of the erroneous information when signing the return. There must also be a determination that assigning tax liability to the innocent spouse would not be fair under the circumstances.
The erroneous item can be anything that results in understated income such as:
- Omitting or understating income
- Claiming tax credits or taking deductions to which they are not entitled
- Providing incorrect valuation of assets
Separation of liability
A spouse who signed a joint return not knowing of his or her spouse’s erroneous action may be able to get the extra tax liability assessed split between the two of them, instead of being jointly and severally liable if one of these conditions is met:
- The parties are divorced.
- The parties are legally separated.
- The other spouse has died.
- The parties have not lived together during the year before relief from tax is requested of the IRS.
If the innocent spouse does not qualify for either of these two bases for relief, equitable relief may be available. This remedy has complicated requirements, but is based on fairness.
This is an introduction to a very complex topic that can be explained further by a lawyer. If you believe that you may qualify, be sure to talk to an experienced tax attorney as soon as possible about your situation because there are deadlines that apply.