It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
I is for Innocent Spouse.
When you file a joint tax return for federal tax purposes, the law holds you and your spouse jointly and severally responsible for the entire tax liability. What this means is that the Internal Revenue Service (IRS) may collect the tax due from the both of you or either one of you. This is true even if you later separate or get a divorce, and it’s true even if your divorce decree says that your ex is responsible for the outstanding tax debt.
Typically, you remain liable for the tax unless you can prove that you didn’t know or had no reason to know about the liability. You are also responsible for any additional tax that might be assessed later as an adjustment or as the result of an audit. That might be due to unreported income (income received by your spouse or former spouse that was not reported) or an incorrect tax deduction, credit, or other adjustment claimed by your spouse or former spouse.
You would seek innocent spouse relief from the IRS when you become aware of the tax liability, and you believe that it is not yours (meaning that it belongs only to your spouse or former spouse) or that it would be unfair to hold you responsible for the tax liability. In most cases, innocent spouse relief is limited to taxpayers who are no longer married.
Remember that if you live in a community property state, the rules may be different. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
You are not eligible for innocent spouse relief if you have entered into an offer in compromise or closing agreement with the IRS (for the same liability). You also do not qualify for innocent spouse relief if you have already been to court where a court considered whether to grant you relief from the joint liability and decided not to do so, or if the court did not consider whether to grant you relief from the joint liability, but you participated in the proceeding and could have asked for relief.
You apply for relief using federal form 8857, Request for Innocent Spouse Relief (downloads as a PDF). Be prepared: The application is several pages long and asks for detailed information about your marital status, living arrangements and finances.
The statute of limitations for claiming relief is typically two years after the date on which the IRS first attempted to collect the tax from you. Some exceptions apply, including a filing of a proof of claim in a bankruptcy proceeding, the filing of a suit against you to collect the joint liability or notification by the IRS of the intent to levy.
Be aware that any claim for innocent spouse relief requires the IRS to reach out to your former spouse – even in cases of domestic abuse. The IRS will then send a preliminary determination letter to you and your spouse or former spouse, and you will both have the opportunity to appeal.
If this sounds draining, you should be aware that it can be. I always urge taxpayers who may qualify for innocent spouse relief to check with a tax professional for assistance.
For more Taxes From A To ZTM 2019, check out the rest of the series: