Sometimes in divorce cases, one spouse will learn that the other spouse on the parties’ joint Federal income tax returns (Form 1040) has failed to disclose income, taken improper tax deductions or failed to pay taxes when due to the I.R.S.. Often, in the course of reviewing the financial records of the parties, one spouse or his/her attorney will discover the error.
However, if you are innocent of the wilful or inadvertent mistake, how can you be protected from potential I.R.S. action to collect the taxes due? You can file I.R.S. Form 8857, “Request for Innocent Spouse Relief” after reading I.R.S. Publication 971, Innocent Spouse Relief. Also beneficial is Form 12507, “Innocent Spouse Statement,” in which more information can be given to the I.R.S. supporting an innocent spouse claim. Be careful as both Forms 8857 and 12507 are signed under penalty if the statements are untruthful. Both Forms 8857 and 12507 and Publication 971 can be obtained free online from the I.R.S.
As the instructions for Form 8857 state, “(g)enerally, both taxpayers who file a joint return are responsible, jointly and individually, for paying any tax, interest, or penalties from your joint return. If you believe the person with whom you have filed a joint return [i.e., your spouse] should be solely responsible for an erroneous item or an underpayment of tax from your joint return, you may be eligible for innocent spouse relief.” Thus, if a request for innocent spouse relief is denied in whole or part by the I.R.S., you may be liable for some or all of the money due from the incorrect tax filing by your spouse. This is a real problem if your spouse cannot be located, has left the U.S. or has insufficient assets to cover the tax debt and you have collectible assets in your own name. Alternatively, if the request is denied, you can file a claim with the U.S. Tax Court.
You must be very careful in completing Forms 8857 and 12507. Form 8857 requires that you not only detail why you feel you are entitled to the relief, but requires a comprehensive disclosure of your health condition, educational attainment, current marital status, when and how you learned of the errors, your role in handling the family finances, and your knowledge of your spouse’s income. You also have to disclose any major purchases or gifts received during the examined tax year, and complete a full financial affidavit with your income and personal expenses. During investigations, the I.R.S. has been known to look at social media posts to see what you knew about the non-payment of taxes.
The I.R.S. uses the Forms seek answers to a couple of important questions: Did you derive significant benefit from the unpaid taxes, did you agree with your spouse about the non-payment of taxes, and did you know or ‘should have known’ about the unpaid taxes?
Form 8857 provides for you to state if you were a victim of domestic violence with court documents to verify same. This will protect your address on the Form from being disclosed to your spouse. Why is this important? The I.R.S. typically contacts your spouse to see if he/she is willing to join with you in your request for innocent spouse relief.
Clearly seeking innocent spouse relief is complicated. An active or potential divorce case can increase the pressure significantly. This must be weighed against the risk of having your assets seized to satisfy the tax debt of your spouse. The I.R.S. does not grant innocent spouse relief freely or often, so the assistance of competent counsel is a must in this instance.
Finally, if you are worried that your spouse will file a ‘shady’ tax return or, worse, not file at all during your marriage, it is recommended that you file your own Form 1040 under the status of ‘married, filing separately’. This may result in more taxes due from you, but at least you will not be part of your spouse’s misdeeds. Remember, beyond taxes due with interest and penalties the I.R.S. has the power to refer serious tax evasion cases to the U.S. Justice Department for criminal prosecution.
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