Individual taxpayers filing joint returns with their spouse have always been entitled to relief, individually, when a joint liability has accrued and the cause of the liability is the fault of the other spouse. This is based upon what is commonly known as innocent spouse relief. Regardless of whether the parties are still married and living together, divorced or living separately for at least twelve months prior to the request, the following conditions must be met:
- A joint return has been filed;
- The return contains an understatement of tax which is attributable to the other spouse’s, individual, erroneous items;
- The spouse seeking relief establishes that when signing the return, he or she neither knew or had reason to know there was such an understatement;
- Taking into consideration all of the facts and circumstances, it is equitable to hold the other party liable; and,
- The election is made within two years of collection activity.
For separated or divorced parties, the allocation rules relate to the liability change and it may not be as straightforward as to the amount of relief the innocent spouse will be granted.
Another path is for the innocent spouse to seek equitable relief. To receive equitable relief, it must be deemed inequitable to hold the innocent spouse liable and there must be no other form of relief available under the innocent spouse rules. The IRS used to argue that the request must be made within two (2) years of the start of the collection activity. The IRS has consistently argued this point making it extremely difficult for taxpayers to receive equitable relief because many did not know collection activity was occurring until more than two years had elapsed. Often, innocent taxpayers relied upon representations of their spouse or ex-spouse that the matters were being timely and correctly handled.
The IRS has recently revised its position on this matter and has removed the two year requirement from equitable relief. This allows taxpayers the opportunity to receive relief from tax liabilities that are attributable to the spouse or ex-spouse at any point in time in which they seek to exercise their right to relief. Those who have applied in the past and been denied solely as a result of the two-year limitation may now file again. This change in position by the IRS represents a significant opportunity for those seeking equitable relief.