On Tuesday, December 9, 2014 The Family Law Committee sponsored the “Innocent Spouse: What Does It Mean And What Does It Get You?” The Speaker was Edward F. Kidner, Esquire from Dearson, Levi & Pantz, PLLC. Ed spoke to a room full of domestic practitioner’s about how our clients could take advantage of the Internal Revenue and Maryland’s Innocent Spouse Relief provisions. Summarily the innocent spouse section of the Internal Revenue Code was intended to protect innocent spouses from their partner’s liability of understated taxes. The party seeking the relief must not have a reason to know that the understated tax existed when they signed their tax return. Ed thoroughly explained the three (3) types of relief that are available to married persons who file joint returns and the various standards that are required to qualify for relief. The three (3) types of relief are: equitable relief, separation of liability relief and innocent spouse relief.
Under equitable relief if the spouses are no longer married this factor weighs in favor of relief. The factors to be considered to obtain equitable relief are marital status, economic hardship, knowledge or reason to know about the understated tax, legal obligation (the IRS will not allow you to get the benefit of innocent spouse relief if you have bound yourself to an agreement in which you become liable for the tax debt), significant benefit, compliance with income tax laws, and mental or physical health. To qualify under the separation of liability relief spouses cannot be a member of the same household at anytime during the 12 month period ending on the date the form 8857 is filed. Separation relief is only available for unpaid liabilities resulting from the understated tax as no refunds will be issued.
Some of the facts and circumstances surrounding the innocent spouse relief are: the nature of the erroneous item and the amount relative to others, the financial situation of the requesting party and their spouse or former spouse (who controlled the money), education background and business experience (the surgeon verses the waitress or stay at home mom), the extent of the requesting party’s participation in the erroneous activity, whether the erroneous items was a departing from a pattern reflected in prior years returns, and were items omitted from the return that a reasonable person would question.
There is also a statute of limitations that must be met when filing for relief which is no later than 2 years after the date the IRS first attempted to collect or as soon as you become of aware of the understated tax. Ed warned of the significance of meeting the filing deadlines and appropriate forms associated with the application for relief.
Upon listening to Ed it became readily apparent that the IRS is similar to the Court of Equity, they take into account all the facts and circumstance of each individual case. The spouse must have clean hands as there cannot be a transfer of property that was part of a fraudulent scheme to defraud the IRS or another third party such as a creditor, former spouse or business partner.