Am I liable for my spouse’s tax debts?
If you are married, filing a joint return may seem like the automatic best option. After all, filing jointly will generally result in greater tax savings. What you may not realize, however, is that by filing a joint return, you will be jointly and severally liable for the taxes. This could become an issue if your spouse commits some form of tax fraud, opening you up to joint liability. Our San Francisco tax attorneys can explore the concept of innocent spouse relief and when it may apply to relieve you of liability for your spouse’s tax fraud.
The Joint Liability Provision
Since 1938, the tax code has contained the joint liability provision, which renders both spouses liable for taxes owed when filing jointly. According to the federal tax clinic at Harvard Law School, more than 50 million couples file their taxes jointly. In 1971, Congress passed the innocent spouse relief rules. The provision allowed for the government to eliminate joint liability if one spouse was not complicit in the other’s bad tax practices. The concept of innocent spouse relief has altered and expanded since its initial inception, and it continues to protect qualifying spouses who are not guilty of their spouse’s underreporting, embezzlement, or other bad tax behavior.
Innocent Spouse Relief Defined
You must meet certain conditions to be considered an “innocent spouse” per the IRS. First, you must have filed a joint tax return which contains an understatement of taxes due. You must prove that at the time you filed the joint return, you did not know, and had no reason to know, of the tax error. Next, the IRS must determine that when reviewing all of the circumstances, it would be unfair to hold you liable for the understatement of taxes. Lastly, you and your spouse must not have transferred property to one another as part of a fraudulent scheme, which could include a scheme to defraud the IRS or a third party.
The IRS will look closely at the facts surrounding the understatement. For example, if you received a significant benefit from the tax understatement, you are less likely to receive relief. The IRS will consider your education level and your financial situation in determining whether you should have known of the understatement. If the IRS is attempting to hold you liable for your spouse’s tax errors or fraud, contact a tax attorney right away.