Many married couples file joint tax returns to take advantage of certain benefits offered by this filing status. This may result in the unfortunate and unintended consequence of one spouse being held responsible for the underreporting of income by the other spouse. Even when there is a divorce decree stating that one spouse will be solely responsible for any amounts due on prior tax returns, the IRS may withhold a tax refund of the other spouse to satisfy the former spouse’s tax obligation.
When a married couple files a joint tax return and penalties arise as a result of an underreporting of taxable income, the IRS will relieve one spouse from liability if that spouse can prove that he or she is “innocent” of any wrongdoing. In order for the individual to obtain relief as an “innocent spouse,” the following criteria must be met:
- The return filed must be a joint return, or, if the return was filed while living in a community property state, the return filed may be a “married filing separately” return
- At the time the return was filed, the individual believed the correct amount of tax was, or would be, paid
- The individual’s spouse failed to report or underreported his or her income
- The individual did not have knowledge of the unreported income or erroneous items at the time the return was filed
- It would be unfair to hold the individual liable for the tax deficiency
- The individual applies for relief no later than two years after the IRS’s first attempt to collect the deficiency
If an individual meets the criteria for innocent spouse relief, the individual will be relieved of responsibility for the tax due on the return or any penalties or interest. Depending on the facts and circumstances, the innocent spouse may be eligible for relief of all taxes due on the return, including penalties and interest, or only partial relief.