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Innocent Spouse Relief Alternatives

Alex Moretsky

When Valarie Stephenson tried to leave her husband in 2003, he put a gun to her head and threatened to kill her. She was so terrified that she remained in the marriage until 2007. She then contacted an attorney and filed for divorce. After the divorce was finalized in 2008, she learned that she was liable for more than $77,000 in unpaid taxes stemming from a joint tax return filed in 1999. During their marriage, Valerie’s husband controlled the finances and Valerie was in the dark.

Unfortunately, Valerie’s situation, though extreme, is not the exception. According to one study, approximately 50,000 individuals each year become responsible for their spouse’s debts through marriage. When filing a joint federal income tax return, existing law states that spouses are jointly and severally liable for taxes assessed on the joint return, even after divorce or the death of one spouse.

Prior to 1998, the IRS allowed innocent spouse relief, but the requirements were so stringent that very few spouses qualified. Congress, concerned that the IRS was seeking taxes from the wrong spouse, expanded relief for “innocent” spouses in 1998. It created exemptions to help relieve wives who were unfairly left oppressive tax burdens by divorced or deceased spouses. There are two main, but distinct, arguments to attain “Innocent Spouse Relief”:

  1. Limited equitable relief for those meeting statutory requirements, or
  2. General equitable relief provided by the Secretary of the Treasury, taking all relevant facts into consideration.

For someone that does not qualify under other forms of relief, “Separation of Liability Relief” is an alternative form of relief. It is available to divorced or separated spouses who filed a joint return during their marriage. This alternative determines the liability of each person separately by allocating income and deductions from the joint return to each spouse, effectively amending a joint return to a separate one.

To qualify for “Separation of Liability Relief” you must show the following:

  1. Filed joint returns for the relevant year(s)
  2. At the time of filing Form 8857, the “innocent” spouse is no longer married or is legally separated, or is not a member of the same household for the last 12 months
  3. Relief does not apply to items spouses knew to be erroneous but signed off on willingly, and
  4. There was no transfer of property to the “innocent” spouse for the main purpose of avoiding taxes

If you do not qualify for “innocent spouse” or “Separation of Liability” you might still qualify for Equitable Relief. The requisites are as follows:

  1. A spouse must have an unpaid, understated or underpaid tax liability and not be eligible under the other Innocent Spouse subsections
  2. It would be unfair to hold spouse liable for understated/underpaid taxes
  3. There was no transfer of property to another party as part of a scheme to avoid taxes, and
  4. The income tax liability from which relief is sought by one spouse is attributable to a tax item or omission of the other spouse

There are also preventable measures and alternative avenues you can take to avoid being in the situation where you need to avail yourself of these remedies. First, you can file separate rather than joint tax returns, especially when you believe your spouse’s financial or business activities are questionable. Second, you can take advantage of a CDP – collection due process – hearing whereby the taxpayer challenges a tax liability or workout an alternative collection arrangement. And finally, if the IRS has levied on taxpayer property you can seek release of the levy and return of the property if it creates an economic hardship whereby the taxpayers cannot pay for reasonable living expenses.

To help you determine your eligibility for Innocent Spouse Relief, contact a Philadelphia, Pennsylvania lawyer who will take the time to discuss your options.