As with most tax questions, knowing whether or not you are liable for back taxes owed by your spouse depends upon a variety of factors. Although this article will discuss various aspects of spouse liability, it’s best to consult with a tax professional who will look at your specific situation and help make this determination. With an Audit Defense membership, you can talk to a tax professional who will look at your situation and assist you through the audit process.
How did you file your tax return?
Most married couples will generally pay less in income taxes when they file jointly, as opposed to filing separately. Thus, the filing status of Married Filing Jointly (MFJ) is claimed by the vast majority of married taxpayers, as it has little downside to it. But that doesn’t mean there are no downsides at all. Filing jointly does have some potential drawbacks that are rarely noticed or taken into account until a spouse is negatively impacted due to the situation or actions of the other spouse.
Joint and Several Liability
Inherent in the MFJ status are the provisions of joint and several liability – and this is one of the downsides to using this filing status. Taxpayers who file a joint return for a tax year are jointly and severally liable for any tax liability in regard to that tax year. What this means is that both spouses are responsible for any tax liabilities either directly stated on the return, or later if subsequent deficiencies are determined. This is true regardless of each spouse’s respective incomes individually, or whether the taxpayers resided in a community property state.
Joint and several liability solves a host of problems for the IRS in their efforts to collect taxes due. One can only imagine the problems that would arise if the IRS had to settle every dispute between spouses based on which of them should pay the taxes.
Breaking Joint and Several Liability
What can a spouse do to escape (find relief) from the negative impact of the joint and several liability provisions when the spouse feels that to apply these provisions would be unfair and that he or she is being impacted through no action(s) of his or her own? This is where Innocent Spouse Relief enters into the picture.
An Innocent Spouse is a spouse who is entitled to relief from joint and several liability. The purpose of the Innocent Spouse rules is to protect the innocent spouse from the dishonesty of the other spouse.
Taxes subject to the Innocent Spouse provisions are not limited to income tax, but also includes the alternative minimum tax (AMT), self-employment taxes (SE), additional taxes, penalties, and interest.
Here are Some Examples of Innocent Spouse Situations
Example 1: Marie and Quincy were married and both had incomes, with Marie working as a server at an upscale restaurant and Quincy working as a mechanic at a local car dealership. Marie collected a fair amount in cash tips which she did not report to her employer, the IRS, or Quincy. Instead, she deposited the receipts in a separate bank account, saving the money for the rainy day she planned on splitting up with poor Quincy. After the split, the couple was audited on their jointly filed return, and the IRS discovered the unreported income. Along with the deficiency, the IRS assessed a failure to pay and a fraud penalty, along with interest. A notice of deficiency was issued to both Marie and Quincy, and it was obvious the taxes were owed. However, Quincy believed he had done nothing wrong and was just caught up in Marie’s wrongdoing.
Example 2: Kerri had been living apart from her spouse for some time, both in a separate property state. They had filed MFS (Married Filing Separately) on their tax returns for the last few years. Kerri’s spouse had passed away unexpectedly, so on her spouse’s final return she decided to file MFJ, as it resulted in what appeared to be lower taxes overall. What she did not know was that her spouse had taken early pension withdrawals prior to his passing. She had been unable to take these distributions into account on their final joint return because she had not received the 1099-R’s, which had been mailed to a third-party address.
How to get Innocent Spouse Relief
Innocent Spouse Relief must be applied for. The spouse who applies for innocent spouse relief is the “requesting spouse” (aka “electing spouse”), and the other spouse is referred to as the “nonrequesting spouse.”
TaxAudit can help individuals in an Innocent Spouse situation properly apply for Innocent Spouse Relief.