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Innocent-Spouse Rule

Innocent-Spouse Rule


The Internal Revenue Service (IRS) generally holds that both signatories of a joint tax return are individually liable for the total amount of tax owed, plus penalties and interest. According to the innocent spouse rule, a spouse can claim that he or she is not jointly liable and he or she does not know of errors or inaccuracies in a joint return.


What is the innocent spouse rule?

This rule is a provision of US tax law, recently revised in 1998, which allows the spouse to seek relief from penalties and fines resulting from the underpayment of tax by a spouse. The rule was created in part because spouses don't tell their partner the whole truth about their financial situation.


Understanding the Innocent Spouse Rule

The innocent spouse rule is intended to protect one spouse and their assets from the ramifications of the other spouse's misleading or deceptive tax returns. This rule applies to married, separated, or divorced spouses.

To qualify for exemption under the innocent spouse rule, all of the following conditions must be met:

  • An analysis of the circumstances and the evidence demonstrates that it would be unfair for the innocent spouse to pay the tax.

  • One of the spouses has filed a joint return that underestimates the taxes owed due to an incorrect item or deduction.

  • The innocent spouse applied for an exemption within two years of the initial attempt to collect income tax.

  • The innocent spouse was not aware of this understatement when he or she signed the statement.

An erroneous item is knowingly classified as misinformed or misrepresented. The innocent spouse rule only applies to tax adjustments based on this type of error and does not apply to non-payment of taxes owed by the spouse.

To claim an exemption, a taxpayer must file IRS Form 8857. Many unmarried taxpayers also apply for separate election liability. This provision may provide a similar exemption to the innocent spouse rule but requires that the spouses are no longer married by reason of divorce or death.

Another difference is the extent to which the judge can decide that the taxpayer shares the responsibility, even if he or she does not know of the error. According to the separate election liability rule, the court may establish that the taxpayer bears some liability for taxes owed as a result of the oversight.


Innocent Spouse Rule Example

John discovered that his wife, Jane, had misrepresented their joint tax information, and the IRS demanded payment for this error. John wanted to invoke the innocent spouse rule because he didn't know about the misrepresented tax information when he signed the return.

The court reviewed the circumstances and evidence and concluded that, although John was not actually aware of Jane's distortion, under the circumstances, he should have known (documents presented in this case showed that Jane and John had discussed issues related to the defect). In this case, John is not eligible for relief under the innocent spouse rule.


The Lack of Knowledge Clause for Innocent Spouse Relief

The most tricky aspect of the innocent spouse requirements listed above is that the taxpayer is unaware of the wrongdoing in question. Some court decisions have imposed on the plaintiff spouse what may appear to be a higher standard than that explicitly stated in the rule: to be aware of the wrongdoing, even if there is no litigation they are not aware of.

Others have decided that the spouse can only qualify for an exemption unless they carefully review the tax return and personally investigate suspicious sections. Many commentators believe that these requirements place unwarranted expectations on well-educated claimants.

While the burden of proving non-compliance rests with the IRS in most tax disputes, the ignorant portion of the rule essentially requires the taxpayer to prove that they were unaware of the error. Otherwise, they will be responsible for incorrect filing.


Summary

  • The innocent spouse ruling assumes that a spouse was unaware of the other spouse's reporting error and is therefore not responsible for the tax consequences and penalties.

  • Some think the decision is too vague and cumbersome for the claimant to prove they investigated the wrongdoing. It can ruin relationships because of a simple tax filing error.

  • While most tax errors fall on the Federal Revenue Service to prove non-compliance, it places the necessity for proof on the claimant themselves.


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