How to protect yourself from a tax-cheating spouse

Couples who elect to file a joint tax return enjoy many advantages. But when you do file jointly, know that both spouses are "jointly and severally liable" for the taxes owed.

This means if one spouse is a tax cheat, leading to a problem with the IRS, both signers of the joint return are equally responsible. That can raise an issue of fairness when one spouse had no knowledge his or her spouse is a tax cheat.

For this reason, under Section 6015, current or former spouses have three ways to obtain relief from taxes due, interest and penalties that result when their tax-cheating spouse improperly reports income, deductions or tax credits on their jointly filed tax return.

One of the most important procedural steps that must be followed under all three methods is that the spouse requesting relief must file Form 8857 – Request for Innocent Spouse Relief no later than two years after the date on which the IRS first attempted to collect the tax in question. Failure to perform this step in a timely manner can result in the IRS denying your request.

Under the first method, four requirements must be satisfied to gain relief:

Under the first method, four requirements must be satisfied to gain relief:

  • First, the spouse requesting relief must have filed a joint return with the other spouse.

  • Second, the understated tax due on the return must be caused by the other spouse's improper reporting of their income or deductions.

  • Third, and the most difficult to prove, you must show that when you signed the return, you didn't know and had no reason to know there was an understated tax.

  • Finally, when considering all the facts and circumstances, the IRS must believe it would be unfair to hold you liable for the additional tax due on the return in question.

The second method is known as partial relief, which is granted when the understated tax on a jointly filed return is allocated between the spouses (often in proportion to their incomes). The spouse seeking relief must be divorced or legally separated from the spouse with whom the joint return was filed or not be a member of the same household during the 12-month period ending on the Form 8857 is filed.

The third method is called the equitable relief provision. This is considered only when no relief is available under the first two methods. Under this provision, the IRS has discretion to grant equitable relief to a requesting spouse after it considers all the facts and circumstances, and concludes it would be inequitable to hold the requesting spouse jointly and severally liable for the additional tax due.

In this case, there must have been no transfers of assets between the spouses or to a business that's part of a scheme to defraud the IRS or to avoid tax. Also, the requesting spouse must prove he or she did not know any part of the tax return was fraudulent when it was filed. Finally, the income tax liability for which the spouse is seeking relief must be the result of the other spouse's income and/or deductions.

The IRS will consider the spouse's marital status, ability to pay and whether he or she had any reason to know of the erroneous items that lead to the underpayment of tax. The IRS will also review the spending and finances of the spouse to determine if he or she received a significant benefit, either directly or indirectly, from the understated tax.

A "significant benefit" is subjective in nature and is any benefit in excess of normal support. If the spouse is a victim of abuse or domestic violence, the IRS may decide in that spouse's favor when other factors may have weighed against relief.

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