Married couples may file a joint federal income tax return together, reporting their joint income and expenses. The benefit of a joint return is that the overall tax rate may often be lower. However, if a joint return is filed, each of the spouses is fully and individually liable for all taxes that are required to be paid.
Married couples may also elect, instead, to separately file their own returns. The downside is the tax rate for each separately-filing spouse may be higher, but each spouse is only liable for his or her own taxes – and not the taxes of the other spouse.
If a joint tax return is filed by a married couple, and the taxes are not paid or the IRS comes in and audits – asserting that additional taxes are due – a spouse may be entitled to be excused or relieved from this joint liability under the IRS “innocent spouse” provisions. However, simply filing a joint tax return with a spouse does not mean the other spouse is “innocent” and entitled to relief. There are different types of innocent spouse relief, and specific conditions must be met for each to apply.
The general requirements for innocent spouse relief are:
- A joint return was filed for the tax year;
- There is an understatement of tax on the return attributable to “erroneous items” of the other spouse (e.g. unreported income, unsupported deductions claimed);
- The spouse seeking to be relieved of joint liability can show that, in signing the joint return, he or she didn’t know and had no reason to know of the unreported income or bad deductions;
- Taking into account all the facts and circumstances, it would be inequitable to the spouse seeking relief to be liable for the joint taxes attributable to the unreported income or bad deductions of the other spouse; and
- The spouse seeking relief files an application with the IRS requesting innocent spouse relief within 2 years after IRS first began its efforts to collect the joint taxes.
A spouse may also be eligible for innocent spouse relief, and without the limitation that an application be filed with the IRS within 2 years of the beginning by the IRS of collection action, under “equitable” innocent spouse relief rules. Due to the 2-year time limit on filing for “traditional” innocent spouse relief above, many applicants now file for “equitable” innocent spouse relief, and which largely considers the same factors as traditional innocent spouse relief.
There are also specific provisions applicable to spouses seeking relief where a joint tax return has been filed, but the taxes have simply not been paid, as opposed to where the IRS has audited and asserted one spouse failed to report income or claimed bogus deductions. There may be an opportunity to request “separate tax return” liability where the applying spouse seeks to pay his or her share of what they would have owed had they filed married-filing separately tax returns.