Commonly referred to as “Innocent Spouse and Separate Liability Relief”
Imagine you just completed your divorce process. Then you get a notice from the IRS indicating you are liable for a tax debt that your spouse should have paid while you were married. Can you believe this? Well, it does happen. So, what can you do?
Background and context
It is important to know when you get married and check the box with a filing status of “married filing jointly” on your tax return, your name automatically becomes associated to any and all information reported on your tax return. The IRS takes the view that you signed the return and therefore authorized all the information reflected on the tax return is accurate and complete. Claiming ignorance or lack of knowledge usually is not acceptable to the IRS. If your spouse understates income or overstates deductions, right, wrong or indifferent, you are wholly responsible for the tax liability associated with the misstatement, plus potential penalties and interest. This does not mean your spouse is not liable. It simply means the IRS can come after you personally for the entire tax obligation due if the tax liability remains unpaid. Why? You filed as married filing jointly with your spouse during your marriage. A tax return creates a connection of liability between you and your spouse for each and every tax return, assuming the statute of limitations has not expired.
What to do if the IRS makes you pay for your spouse’s liability after your divorce?
There is something in the Internal Revenue Code (IRC §6015) called the Innocent Spouse and Separate Liability Relief provision. As the phrase indicates, this translates into you making a claim (technically an election) to be innocent from your spouse and attempting to have a separate tax liability from your spouse too.
In order to receive this Innocent Spouse and Separate Liability relief you have to file an election to indicate you should have separate liability from your former spouse. You have to provide evidence that you:
- Are no longer married or are legally separated
- Have not lived in the same household with your former spouse for at least 12 months prior to making the election
After the IRS receives your election, the IRS will evaluate:
- Whether you are currently married or not
- The degree of economic hardship you would incur as a result of the tax liability
- Your rationale and logic you used to make your case
- The benefit you will obtain as an “innocent spouse”
- Whether you have remained compliant with the tax laws throughout the years
- The degree of abuse (physical of mental) you may have endured during your marriage
The form that needs to be filled out is Form 8857. Generally, this form has to be filed no later than 2 years after the IRS attempts to collect the tax from you. Otherwise, you may be out of luck to receive any financial relief.
It is important to note, the deadlines to file the form and whether you will receive any financial relief is dependent on the type of relief you are seeking. There are 2 primary types of relief.
- Relief from paying an outstanding balance due — If this is the type of relief you are seeking you may have up to 10 years to file the required information from the date the tax liability was assessed. In certain situations, the 10 year period may be suspended.
- You are requesting a tax credit or refund — If this is the type of relief you are seeking, you must file your request for relief based on the later of (a) 3 years from the date the original return was filed or (b) within 2 years from the date the tax was paid.
If the IRS sees you as liable for the payment, you will need to demonstrate unquestionable proof that you deserve financial relief. It is worthy to note, if you signed a joint return under any duress the IRS may deem the tax liability to be separate from your spouse. In other words, you might be off the hook and your spouse might be fully liable for the tax liability.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.