What is the Innocent Spouse Rule with the IRS?

Fifty years ago, when most women were economically dependent on their husbands and less well-educated than them as well, the IRS innocent spouse rule was almost a magic wand that made tax problems disappear, if the claimant met certain qualifications. Those qualifications are much the same today. However, since the economic and educational climate is so much different, the IRS innocent spouse rule defense is much harder to prove.

The tougher environment underscores the need for an experienced Chicago tax lawyer to handle these claims. An innocent spouse rule defense is far too complex to be the training tool for an inexperienced lawyer. Additionally, the liability, penalties, and interest in these cases is usually mind boggling, and the IRS holds most of the cards during settlement negotiations. Only a tough lawyer can obtain a successful outcome.

Joint Return

The first element of the IRS innocent spouse rule is quite straightforward. The spouses must have filed a joint return. MFS (Married Filing Separately) returns don’t count. Neither do the separate tax returns of people who live together and share income.

Timely Filing

This element is almost as straightforward. The claiming spouse must file Form 8857 within two years of the IRS’s first collection attempt.

Usually, IRS collection efforts begin with a “Dear Taxpayer” letter which requests additional documentation or form revision. This letter normally isn’t a collection effort for IRS innocent spouse rule purposes, unless the letter also includes an amount demanded.

Spousal Error Understated Tax

Most IRS innocent spouse rule matters involve income understatement. That understatement could be a mathematical error or an intentional omission of an income stream. Regardless of the nature of the error, the same spouse that prepared the return must make the error.

This point brings up an important side note. Innocent spouse relief is usually unavailable if the third-party preparer made an understatement error. Relief is usually available in these cases, normally through a negligence claim against the provider. But that’s the subject of a different blog.

This prong is a little more complicated in other cases. For example, if the preparing spouse had a reasonable, good faith belief that the couple was entitled to an exemption, exclusion, or deduction, the spouse might not have made an “error” under the IRS innocent spouse rule. Such preparing spouses certainly don’t appear negligent or callous, which is an indirect requirement we’ll discuss below.

Lack of Knowledge

This element is probably the big one, mostly because actual or constructive knowledge is sufficient to hold an “innocent” spouse liable for tax debt.

As for actual knowledge, taxpayers have a duty to read forms before they sign them. They also have a duty to ask questions if something doesn’t look right. If Anne doesn’t notice a mathematical error, or doesn’t examine the return, she’s probably not entitled to innocent spouse relief for that error. The same principle applies if Frank (Anne’s husband) claimed children who aren’t dependent on Anne and Frank.

Constructive knowledge is “should have known.” Assume Frank declares a $75,000 pretax income. Anne and Frank live in a Wayne Manor-style home, they each drive new sports cars, and they spend their winters in Bali. Anne, especially if she’s a reasonably well-educated woman who has some experience in paying for things, must know that $80k cannot possibly support such a lifestyle.

Unfairness

The innocent spouse rule doesn’t apply if the claimant checks all the boxes, yet it wouldn’t be unfair to hold the claimant liable for the tax. Since women are better educated and more economically independent today, unfairness is harder to show, especially if the spouse’s error wasn’t intentional.

The IRS considers factors such as whether you benefited significantly from the understatement (a trip to Bali sounds pretty beneficial), spousal abandonment, current marital status, and previous tax compliance record.

Work With a Detail-Oriented Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a confidential consultation with an experienced tax lawyer in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.

Source:

irs.gov/forms-pubs/about-form-8857