Innocent Spouse Relief: For Victims of Financial Indiscretions

Tax time is upon us. Most people don’t look forward to organizing a year’s worth of income and expenses, but for some couples, especially those facing or going through a divorce, the process can be particularly complex, both financially and emotionally. This month, the IRS announced that more innocent spouses will qualify for relief if it is discovered that the other spouse, with whom they filed a joint income tax return, did not properly report household earnings.

Innocent spouse relief eliminates your “responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return.” The notice, effective immediately, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating requests for relief. According to the IRS Commissioner Doug Shulman, “These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

The threshold conditions for receiving innocent spouse relief are as follows:

1. The requesting spouse filed a joint tax return during the year for which he or she is seeking relief.
2. Relief is not available under another section of the tax code.
3. The request is made within the IRS’ time restrictions: generally, three years from the time the return was filed or two years from the time the tax was paid, whichever is later.
4. No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.
5. The non-requesting spouse did not transfer disqualified assets to the requesting spouse.
6. The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.
7. The income tax liability from which the requesting spouse seeks relief is at least partially attributable to an item of the non-requesting spouse, or an underpayment resulting from the non-requesting spouse’s income.

The notice clarifies that no one factor or a majority of factors necessarily controls the determination of whether relief should be granted. Therefore, relief may still be appropriate even if a number of factors weigh against relief. For example, actual knowledge of an understatement or deficiency will not be weighed more heavily than other factors, as it was in the past. Furthermore, if the spouse requesting relief was abused or restricted from household financial information, and thus unable to challenge the treatment of items on the joint tax return for fear of retaliation, the abuse or financial control will weigh in favor of relief even if the requesting spouse had reason to know of the understatement or deficiency.

Seek Supportive, Experienced Divorce Representation

If you are facing divorce and all of the potentially complex legal and financial issues that come with it, please contact Lana Hawkins, Attorney at Law, at The Hawkins Law Firm for advice and counsel from an experienced Alabama divorce attorney.