Innocent Spouse Relief and the IRS

Stephen J. Dunn, a Forbes tax writer, recently blogged recent developments regarding an expansion of the IRS’ innocent spouse relief. Dunn, who often writes about the dangers of filing joint income tax returns, as well as the trouble couples face when securing innocent spouse relief. He gave a hypothetical situation to explain what couples face.

In the situation, the wife earns a good salary. Because she has enough Federal income tax withheld from her wages and paid to the IRS, she does not have a tax liability. On the other hand, her husband is self-employed and makes no estimated income tax payments to the IRS. The husband owes a great deal of Federal income tax on the income.

As a married couple, they have several options when it comes to filing income tax returns with the IRS. They may file separately as “married filing separately,” or together with a joint income tax return. With each option, there are very differing outcomes. If they file separately, the husband will owe a great deal of income tax, while the wife will not owe anything and may even receive a refund. If the couple files jointly though, they will be jointly and severally liable for the income tax they report on the joint return. The designation of “joint and several liability” refers to the fact that each spouse becomes liable for the entire amount that is owed. It is important to note that while each may be liable for the full amount, the IRS cannot collect more than that. If the couple elects to file the joint return, the decision cannot be revoked, not even by an amended return.

Dunn notes that accountants will often prepare joint returns for couples without notifying the wife of the alternative option.

According to Internal Revenue Code 6015, the Commissioner of the Internal Revenue Service has the power to relieve a spouse from liability in the event of a joint income tax return. In the past, and even after an addition to IRS procedure interpreted the section of the code, both the IRS and the U.S. Tax Court have not been generous in giving relief. The strict, narrow denial of relief has been the common course of action for both governmental entities.

Recently though, there has been an increase in applications for innocent spouse relief being granted. In January of 2012, the IRS issued Notice 2012-8 that makes innocent spouse relief more readily available to taxpayers. There have been instances in which individuals that were denied relief by the IRS Innocent Spouse Office, but when they appealed the decision, they were granted relief by IRS Appeals.

Dunn suggests that those who have been denied relief in the past may want to reapply under the new rule.

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