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The IRS Innocent Spouse Rule

The IRS Innocent Spouse Rule

Joint filing has its benefits, and that is why most couples opt for it. But, just as there are benefits to filing jointly, it also comes with its downsides. This often takes the form of additional interests or specific penalties that usually accrue when one of the filing partners defaults on tax payments or doesn't give a proper declaration of financial assets. These interests or penalties are still effective even when the partners go separate ways, either in a divorce or separation.  Both of them are still responsible for the entire tax burden. 

Even when one of the partners is in the dark about the details of the tax returns or is the sole financier of the tax return, both will be held responsible if any party defaults and incurs a penalty for a false declaration of assets corresponding to wrong tax deductions and returns. This still holds firm in the case of a divorce, when one of the parties has been declared legally responsible for taking care of expenses such as joint tax returns. 

However, relief is available for spouses whose partners had defaulted in the correct payment of taxes by declaring a false total of their assets. Some of these reliefs include:

  1. Innocent Spouse Relief

This extricates a spouse from any further payment of taxes incurred by a partner or a spouse defaulting on stating the actual sum of their earnings.

  1. Separation Liability Relief:

This applies when partners have separated or divorced and aren't staying together anymore yet are bound to pay taxes accrued due to a wrong statement of financial assets. Here, instead of bearing the total weight of the additional tax, it is shared between both partners, and hence the burden is reduced.  

  1. Equitable Relief

This comes into play when the above-listed relief doesn't apply to the individual in question. In this case, there was a false declaration of assets, usually by the second partner. But as the innocent or unaware partner, if you are not granted a separation or innocent spouse relief, you could be given an equitable relief if the amount filed on the tax return was correct, but the amount paid didn't tally. That is only when this relief is awarded.

The Innocent Spouse Rule

 This was passed into law and was last revised in 1998. It states that spouses will be provided relief from the payment of additional tax incurred by their partners' incorrect statement of financial assets. This was enacted to provide relief for spouses who were kept in the dark by their significant other about the actual total of their financial support after filing jointly, and as a result, making them co-responsible for the resulting tax penalties.

How does the rule work, and what are the criteria to qualify?

The innocent spouse relief can be applied for when a spouse who filed jointly with their partner is made aware of additional tax costs resulting from their partner withholding some vital information regarding their financial assets.

To qualify for this relief, the following requirements must be met.

  1. The spouses must have filed jointly for a tax return that had a wrongful declaration of the couple’s total financial assets.

  2. The spouse applying for the relief must have been unaware of this.

  3.  Once this is brought to the notice of the IRS, and they have verified it, it is up to them to declare the spouse that is applying for the relief innocent, and hence absolve them of the tax obligations.

  4. Requests for this relief should be made within two years of issuance of the penalty by the IRS.

  5. Then, the IRS form for this purpose, form 8857, must be filed by the spouse. Separated, divorced, or widowed spouses can also fill this form to apply for the separation liability relief. The court also decides what percentage of the additional tax goes to the spouse who is applying for the relief. Depending on the court's ruling, they may be totally or partially relieved from the payment of the extra tax. 


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