I am fortunate to be married for 20 years to an extraordinarily beautiful woman, who had impaired judgment when she consented to my marriage proposal. All of her friends felt that way, as do most of mine.
Unfortunately, she is also very smart, much more so than I. As a result, she would never qualify for innocent spouse treatment if we were ever to owe taxes.
But is that really true? Can she be smart and still qualify? Today we’re going to talk about innocent spouse law and answer that question.
The general rule is if a husband and wife file a joint return, they are each liable for the full amount of taxes owed. Further, if the IRS audits that return and alleges additional taxes are due (perhaps it finds additional income or disallows some expenses) they are each liable for that additional tax, penalty, and interest as well.
This general rule created much hardship. Many times the additional taxes arose from the husband’s business and the wife didn’t participate in that business. She often did not even know about the income or the expenses and even if she did, often times the husband said he would pay the taxes but didn’t. Other times the husband kept all of it a secret from the wife. As divorces became much more commonplace and much easier to obtain, wives got stuck with their husband’s taxes and often brought them into the new marriage. New husbands could have their assets become liable for the prior husband’s taxes, not a good way to start a new marriage.
So Congress passed a law to protect these people, which was commonly known as innocent spouse relief. It basically said that if you file a joint return with a spouse, and didn’t know about the unreported income or improper deductions, and didn’t benefit from it, then the IRS has the discretion to relieve you of liability.
The IRS never really liked this law and interpreted its provisions very narrowly. It issued numerous restrictions and took a very tight view on who qualified. The law did not work very and a lot of people were hurt. Tax advisors submitted countless applications that were routinely denied; because of this, many innocent spouses suffered along with their new spouses.
Congress then took steps to fix this problem. It repealed the innocent spouse statute and adopted an entirely new statute, significantly expanding relief provisions. It is no longer even called the innocent spouse rule. Instead, the IRS changed its requirements and many more people are being granted relief, and are receiving it more quickly than before.
Briefly, the new rules can apply whether you file a joint or a separate return, whether you live in a community property state or not, and can even apply simply on an equitable basis alone.
However, there is one big caveat here. You really need to know what you are doing. You must know the law and the IRS procedures. There are several statutes and they involve numerous treasury regulations, revenue procedures, revenue rulings, etc.
Who can help you? Few accountants would attempt to take these cases on and fewer enrolled agents. You really need a specialist in this area. I have a number of cases that were botched by prior representatives. Most of all, don’t fall prey to advertisers using billboards and 800 telephone numbers.
And one last thing, as bitter as divorces can be, the honorable thing to do is to consent to relief for a truly innocent spouse and not use it as a tool to hurt them.
Anyway, my smart beautiful wife can now qualify for innocent spouse relief from taxes, but not from her poor judgment in marrying me.