Trust is necessary for a successful marriage. In our tax practice, we see how misplaced reliance on a spouse’s integrity may not only break a heart, but also bring an undeserved tax bill.
Innocent spouse relief
The IRS has a legal mechanism that may help a blameless spouse in this situation: innocent spouse relief, which can forgive the tax debt of one spouse when a joint return was filed in certain circumstances. Usually, the relief comes into play when one spouse signs a joint return in good faith without knowing that the other spouse had negligently, recklessly or willfully misstated something on the return that reduced tax liability or increased a refund.
This often happens when the innocent spouse has responsibility for the household and children and the other spouse works to support the family and handles financial matters like bills, expenses, purchases and investments. The working spouse would be the one to provide most of the figures used to prepare a tax return.
Joint and several liability
On a joint return, each spouse is individually responsible for the entire amount of tax owed. If the IRS reviews a joint return and discovers that income was understated, deductions inflated or credits taken for which the couple was not qualified, each spouse individually will be liable for the entire amount of resulting taxes, plus penalties and interest.
The IRS may aggressively try to collect this tax from the innocent spouse such as by garnishing wages or seizing accounts or other assets. The innocent spouse rule was created to give relief to the blameless spouse in this situation.
Valid joint returns
Innocent spouse relief is only available when spouses filed a valid joint return. While this seems simple, this question can be complicated legally, underscoring the need to hire an experienced tax lawyer to assist with an innocent spouse defense.
A recent published U.S. Tax Court case dealt with this issue, a question of fact that hinges on the parties’ intentions. In the innocent-spouse case of Okorogu v. Commissioner of Internal Revenue, the court applied the “tacit consent” rule to decide that although the wife had neither signed the joint returns in question nor participated in their preparation, the behavior of each spouse and the facts as a whole supported a finding of valid joint returns.
Okorogu concerned a husband and wife who had immigrated from Nigeria. The husband was abusive and controlling, keeping the wife isolated from household financial matters. The IRS asserted tax deficiencies for two years in which joint returns had been filed without the wife’s knowledge, but which included her electronic signature. The agency found that tax was owed because the returns understated income for several reasons.
Factors that supported a finding of wife’s implied or tacit consent to valid joint returns:
- The IRS’ action of issuing a tax-liability notice to both spouses created a “presumption of correctness” based on the agency’s treatment of the returns as joint and valid.
- The wife did not know she was required to file a return because of different laws in Nigeria, but she testified that she would have signed the returns had she known because she is “law abiding.”
- The husband contributed to the wife’s lack of knowledge by controlling her financially and socially.
- When the wife later became aware of her tax reporting responsibilities, she began to file her own returns and she did not amend the earlier joint returns.
Bases for relief
The spouse asserting an innocent spouse defense may base it on:
- No knowledge of or reason to know of the understatement of tax due, along with equity or fairness favoring relief
- Separation or divorce, in which the liability may be divided between them instead of assigning each individual liability for the entire amount
- Equity or fairness, if they are separated or divorced, the spouse had no knowledge or reason to know of the understatement, and financial hardship would be created if the innocent spouse is not granted relief
Innocent spouse relief is a complex area of tax law, so an attorney should be consulted for questions.