Separation of Liability and Equitable Relief

Most married taxpayers choose to file taxes jointly due to certain benefits associated with this filing status. When a couple chooses to file a joint tax return, both taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise from joint return, even if the couple later separates or divorces. Both joint and several liability means that each taxpayer is legally responsible for the total liability. Therefore, both spouses on a married filling jointly return are usually held liable for all the tax that is due. This is the case even if one spouse made all the income or claimed deductions or credits. This is also the case in the event that a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. A situation may occur however, where a spouse gets the other spouse into a substantial amount of debt. Upon separation or divorce the innocent spouse discovers that they are in a financial crisis and wishes to alleviate some of the accumulated debt. In cases such as these, a spouse can be eligible for relief from being jointly and severally liable.

Types of Relief
There are three types of relief from the joint and severally liability of a joint return. These three types are as listed:

1. Innocent Spouse Relief provides an individual with relief from additional tax that an individual owes if their spouse or former spouse failed to report income, reported income improperly, or claimed improper deductions or credits.
2. Separation of Liability Relief gives separate allocation of additional tax owed between an individual and their former spouse or their current spouse that they are separated from or no longer cohabitating with. This is when an item was not reported properly on a joint return. The individual is still responsible for the amount of tax allocated to them.
3. Equitable Relief may be applicable when an individual does not qualify for innocent spouse relief or separation of liability relief for something reported improperly on a joint return that is generally attributable to the individual’s spouse. An individual may also qualify for equitable relief if the amount of tax reported is correct on the individual’s return but the tax was not paid with the return.

It’s important to note that an individual seeking innocent spouse relief or separation of liability relief must request their relief no later than two years after the date the IRS first attempted to collect tax from them. An individual wishing to apply for equitable relief, must request relief during the period of the time the IRS can collect the tax from them. In the event that a person is looking for a refund of tax that they paid, then they are required to request it within the statue period for seeking a refund. This is generally three years after the date the return is filed or two years following the payment of tax, whichever is later. Refunds are not available under separation of liability relief.

Requirements for Relief
To seek innocent spouse relief, separation of liability relief, or equitable relief, an individual should submit to the IRS a completed form 8857. Request for Innocent Spouse Relief, or a written statement containing information required on Form 8857 which is signed under penalties of perjury. The IRS is required to notify the spouse you filed jointly with and allow him or her to provide information for consideration. Finally, in order to qualify for innocent spouse relief, separation of liability relief, and equitable relief an individual must meet all of the qualifications.

– Innocent Spouse Relief

• An individual must have filed a joint return that has a deficient statement of tax that is solely attributable to the other spouse’s erroneous item. An erroneous item is an item that includes income received by the other spouse is not included in the joint return. Other items such as deductions, credit, and property basis can be incorrectly reported on a joint return.
• The innocent party must establish that at the time that they singed the joint return that they were not aware of, and had no reason to know, that there was an understatement of tax. Furthermore, the innocent party must show that it would be unfair to hold the innocent party liable for the understatement of tax upon reviewing all the circumstances and facts.

– Separation of Liability Relief

• The party filing for this type of relief must be divorced or legally separated from the spouse with whom they filed the joint return
• The party must be widowed
• Finally, the filing party must be living in a separate household as the spouse with whom they filed the joint return at any time during the twelve month period ending on the date that they requested relief.

–Equitable Relief

• Filing party must establish that under all the facts and circumstances, it would be unfair to hold them liable for understatement or underpayment of tax.
• Additionally, the moving party must also meet other requirements listed in Publication 971.