Innocent Spouse Relief : QUESTION: If I signed a joint tax return with my husband and the return was audited by the IRS and I had minimal or no knowledge of my husband’s business or work activities, will the IRS hold me personally liable for the taxes due?

Dennis M Hasse writes: Spouses who file joint income tax returns bear the joint liability for the taxes, interest and penalties that may arise from their return. This means that each spouse is responsible for full payment of the tax shown due on the joint return. But experience has shown that strict observance of the joint liability rule may prove to be unfair, where one spouse is without any knowledge of one or more items on the return or an item is erroneously reported on the return; it would be unfair to hold that spouse liable for the tax liability due for that item. The innocent spouse rules exist to protect that spouse from tax liability in these situations.

There are three kinds of relief available to the innocent spouse from the joint liability for filing a joint return.

A. First, under the Internal Revenue Code, a joint filer may seek innocent spouse relief from joint liability if:

• There is an underreporting of tax due to an erroneous item of non-innocent spouse filing the return;
• The innocent spouse can prove that in signing the return she did not know and had no reason to know that there was an underreporting of tax on the return;
• It would be unfair to hold the innocent spouse liable for the tax deficiency based on her facts and circumstances; and
• The innocent spouse chooses to apply for innocent spouse relief within two years from the date the IRS attempts to collect the tax.

If the above conditions are met, the innocent spouse will not be liable for the tax, interest and penalties due for erroneous items on the return.

B. Second, under the Internal Revenue Code, innocent spouse relief may be available for spouses who become divorced, legally separated or were not members of the same household after a joint return has been filed.  This provision generally allows an innocent spouse to opt to be liable for only that portion of the tax deficiency attributable to that spouse’s income.  For example, if the wife works, she would owe tax only on her income. Specifically, this provision requires that the innocent spouse seek innocent spouse relief no later than two years from the date the IRS sends a notice. The spouse who is seeking innocent spouse relief must meet one of the following conditions:

• At the time the spouse seeks innocent spouse relief by filing a request with the IRS, the innocent spouse must be divorced, widowed, or legally separated from the other joint filing spouse.
• The innocent spouse must not be a member of the same household as the other joint filing spouse at any time during the 12 month period prior to asking for innocent spouse relief.

C. Third, under the Internal Revenue Code, innocent spouse relief may be available if the spouse is not eligible for relief under A and B above, because it would be unfair to hold the spouse liable under the particular facts and circumstances.  Generally, the IRS will grant innocent spouse relief where it would be unfair to hold the innocent spouse (requesting spouse) liable, if following requirements are met:

• The spouse seeking innocent spouse relief is no longer married to, or is legally separated from, the other spouse, or has not been a member of the same household as the other spouse at any time during the 12-month period prior to asking for innocent spouse relief.

• The spouse seeking innocent spouse relief had no knowledge or reason to know that the non-innocent spouse would not pay the income tax.  She must show that it was reasonable to believe that her husband would pay the reported tax.

• The innocent spouse will suffer economic hardship if relief is not granted.