In situations where other types of relief are not available, you may be able to seek relief from your spouse’s tax debt with separation of liability relief. You have to meet specific requirements to qualify for this type of innocent spouse relief, but if you do, you may be able to reduce your share of the taxes to the portion from just the income you earned. You can be set free from taxes on money your spouse earned.
The Basics of Separation of Liability Relief
Separation of liability relief is outlined under Internal Revenue Code Section 6015(a). When one spouse underreports income, claims deductions to which they are not entitled, or claims credits improperly, both spouses end up liable for the taxes due if they file a joint tax return.
However, if one spouse does not know about their spouse’s efforts to understate their income or otherwise decrease their tax bill, the innocent spouse may be able to have the taxes split up. This results in them only owing their share based on their income.
This is an especially useful option for a divorced couple that still has tax debt from a year in which they filed a joint tax return or separated couples living in different households. It can also apply to widowed taxpayers.
Note that separation of liability relief only provides relief from taxes you currently owe. If you have already paid taxes, this form of relief does not allow you to request a refund.
The Role of Joint and Several Liability
Joint and several liability is an important concept when it comes to married couples owing taxes. When a married couple files a joint tax return, they accept joint and several liability for the taxes owed. That means that they are responsible for the taxes both separately and individually – the IRS can collect from either one or both of them until the full tax debt is paid.
In most cases, couples pay taxes together. However, the IRS holds each individual party responsible for the full amount owed until it is paid in full, regardless of how much either party earned or contributed to the tax situation in question.
Here’s a quick example: say that one spouse earned $10,000 and the other spouse earned $200,000. If they file a tax return jointly, the return will show a taxable income of $210,000. Both spouses are fully responsible for the taxes due on the full $210,000.
If the spouse earning $200,000 dies, leaves the country or refuses to pay the tax bill, the IRS can hold the other spouse responsible for the full tax debt, even though they earned very little during the year. Innocent spouse separation of liability relief is designed to help in cases like this.
What if you filed as married filing separately?
The joint and several liability rules do not apply if you filed as married filing separately. When a married couple files separate returns, each person is only responsible for the tax due on their own return unless they lived in a community property state.
Tax debt liability for married couples in community property states
Note that the rules vary in what are called “community property” states. In community property states, spouses are jointly and severally liable for all debts incurred during the marriage. Thus, even if you file a separate return from your spouse, you can be held liable for the tax debt shown on their return if you live in a community property state.
That means that couples in community property states can apply for innocent spouse relief on separately filed returns, but that’s not necessary for couples who filed separate returns in non-community property states.
Eligibility Criteria
As with any relief program, the IRS has a list of requirements you must meet before you can apply. If you apply without meeting these requirements, your application will probably be denied immediately.
First, you have to meet one of these requirements:
- The person requesting the relief is divorced or legally separated from the person with whom they filed the joint return
- The person requesting relief has been widowed
- The person requesting the relief is separated – they do not share a household with the other party and have not shared a household with them for at least 12 months prior to requesting relief
On top of that, you must not have known about your spouse’s filing choices that led to the understatement of tax. For example, if you knew that your spouse hid a source of income or claimed a deduction they were not entitled to, you cannot request relief.
Other requirements you must meet include:
- You must have filed a joint tax return with the other party (or a separate return, and you live in a community property state)
- The request for separation of liability relief must occur no later than two years after the initial collection action.
- The liability must have already been assessed at the time of the request.
Exceptions for Domestic Abuse
While separation of liability relief is generally not available to spouses who knew of their spouse’s understatement of taxes, there is an exception for victims of domestic abuse. This exception may apply if you were the victim of domestic violence prior to signing the return and you did not challenge the error because you were afraid or threatened.
Equitable Tax Relief
There are a couple of different types of relief that may be available to spouses who have unintentionally ended up entangled in their spouse’s or ex-spouse’s tax issues.
Separation of liability is a type of innocent spouse relief that you can only get once the marriage is over, but there is another option called equitable tax relief. This is essentially a catch-all option that allows taxpayers to request relief if they do not fit into the other categories. They don’t meet the other qualifications and have underpaid or understated taxes, but it would be unfair for the IRS to hold them responsible for the taxes.
For example, imagine a situation where a married couple had underpaid taxes, and Spouse A gave Spouse B a bank transfer to cover their portion of the taxes due. Spouse B used that money for a separate and unrelated purchase, choosing not to pay the tax bill. In this situation, the IRS may find that Spouse A deserves equitable tax relief.
Injured Spouse Relief
A separate but related relief option is injured spouse relief. This does not generally relate to understated taxes but is another option for innocent spouses. If a joint tax return is seized to cover Spouse A’s debts—perhaps back child support, state tax debt, or federal agency debt—but Spouse B had no responsibility for that debt, they may seek injured spouse relief to receive their part of the refund.
Applying for Separation of Liability Relief
Luckily, the process of applying for separation of liability relief is fairly straightforward.
To request separation of liability relief, follow these steps:
- Find your copy of your notice indicating that you owe taxes.
- Fill out Form 8857, Request for Innocent Spouse Relief.
- At this point, the IRS will process your form, contact your spouse or ex-spouse to ask if they want to participate in the process, and decide which form of relief (if any) to apply.
- They may take up to six months to respond to your request.
- At that point, you may request an appeal if they deny your request. Your spouse can also appeal their decision.
Note that the IRS will generally stop all collection actions while your request is pending, but to be on the safe side, take action well before any deadlines on the notices you receive.
Form 8857 is the only form you need to request relief, but you may need to provide additional supporting information. Supporting documentation you may need, per Form 8857, includes:
- Forms showing how you did or did not participate in the return preparation process; this may include W-2s, 1099s, receipts, canceled checks, and other financial documentation
- If applicable, supporting evidence of your domestic abuse, including restraining orders, police reports, medical records, and injury photographs
There is space to answer all of the questions posed by the IRS, but you can also attach additional sheets if you need more space to answer the questions fully.
You must submit your request for separation of liability relief within two years of being notified of your past-due taxes. At the time of your request, you must not have been in the same household as your spouse for at least 12 months without any interruptions. After you submit your form, it may take the IRS up to six months to review it and make their decision. If you or your spouse/ex-spouse want to appeal their final decision, you have 30 days to do so.
Impact of Separation of Liability Relief
If you are granted separation of liability relief, you should follow certain precautions while handling future tax returns and obligations.
Future Tax Filings and Obligations
If you are now legally divorced from your ex-spouse, you won’t have to worry about filing taxes with them again, and so you no longer have to concern yourself with any understatement of taxes on their return. However, if you and your spouse continue to be legally separated but still married, you should consider filing married but separately in the future.
Remember, you can usually only be granted separation of liability relief if you did not know and had no reason to know that your ex-spouse had understated your collective tax liability. At this point, you know that they understated their liability by failing to report income, claiming deductions they were not entitled to, or claiming credits they did not qualify for. Should you file jointly in the future, you have good reason to believe they would do so again—at that point, the IRS may deny your request for separation of liability relief.
If you are worried about your spouse from whom you are separated filing a joint tax return without your consent, you can take steps to file your separate tax return before they file a joint tax return. Furthermore, you can report them to the IRS if they file a joint return without your consent. A joint tax return requires the signatures of both spouses and forging a signature is a crime.
Challenges and Considerations
There are challenges you may face as you seek separation of liability relief. However, you can plan for many of these challenges by filling out your forms accurately, providing thorough information, and giving the IRS all of the supporting documentation you need to prove your case. Possible concerns include:
- Not being separated long enough: If you are legally married but have been separated for at least a year, you can request separation of liability relief. However, the IRS will not grant it if they believe you are still a couple or have not truly been separated for a sufficient period of time. This includes any period of time in the previous 12 months where you lived together or shared a household.
- IRS believes you knew of the error: The IRS will probably deny your request for relief if they believe you knew of the error or should have known of the error. For example, if there’s documentation showing that you assisted in preparing the tax return and you signed off on inaccurate deductions, they may deny your request for relief. Similarly, if you knew about your spouse’s unreported income in any form, they may deny your request.
- Already participated in a related court proceeding and failed to ask for relief: If you go to court for a related issue and do not ask for relief at that time, the IRS will likely say that you are not eligible for relief for that year.
- IRS believes you transferred assets to avoid taxes: If the couple or either individual in the couple transferred assets in a way that looks suspicious, the IRS may believe that you did so to commit fraud or avoid taxes. This would bar you from receiving relief.
Considerations to Keep in Mind
Being careful about how you fill out your forms, double-checking the requirements for relief, and consulting with a tax professional can help you avoid these and other issues that may arise. Remembering these tips may be helpful:
- Provide enough documentation to support your claim that you did not know of your spouse’s/ex-spouse’s error
- Be ready to prove that you are divorced or have been separated for at least 12 full months prior to your filing
- Do not miss the two-year cutoff to request relief
Case Studies
In one filing from the early 2010s, the wife of a renowned businessman in the Midwest requested separation of liability relief due to a lack of knowledge of her spouse’s dealings. Her husband worked in securities, mortgage lending, and real estate sales. He commingled his funds between business accounts and personal accounts and failed to report income from his business activities.
Due to the complexity of his business dealings and income sources, the husband’s insistence on keeping his wife in the dark regarding their finances, and the fact that she was only given the signature page to sign for their joint tax return, the court granted her relief.
The Internal Revenue Code (IRC) also provides case examples that break down how these cases may go in a court of law. Consider an example in which Spouse A and Spouse B file a return but do not pay taxes on Spouse B’s self-employment income. They later divorce. Spouse A requests relief because, although they knew of Spouse B’s self-employment income, they did not know that taxes had to be reported and paid on them. In this example, the court denied the request for relief because the other partner knew of the reason for the assessed taxes—even if they did not know the tax consequences that would follow.
In another example, Spouse A has a significant gambling habit, and Spouse B knows of their issue but does not know if they’ve ever actually won anything. Spouse A has been secretly hiding their winnings in a separate account. The couple divorces and receives separate letters notifying them of a deficiency from a past tax return caused by over $100,000 that Spouse A had won and not disclosed. Although Spouse B knew of the gambling, the IRS would unlikely be able to prove that she should have known of the income and so would probably grant relief.
However, the decision may go a different way if Spouse B enjoyed a lavish lifestyle and expensive gifts due to Spouse A’s gambling winnings. In that scenario, the court may determine that Spouse B should have figured out Spouse A’s source of income.
Alternatives and Complementary Solutions
Even if you do not qualify for separation of liability relief, other options may be available to you. When you submit Form 8857, the IRS will also evaluate whether or not you qualify for other forms of innocent spouse relief. If you qualify for other options, the IRS may grant you relief.
If you run out of innocent spouse relief options, you can still use other programs to pay down your debt over time or pay a compromised or settled amount.
IRS Relief Programs to Consider
Options you may want to explore include:
- Offer in compromise: If you cannot pay your share of your marital tax debt, you may want to request an offer in compromise. The IRS is likely to grant your request if your offer shows that what you are genuinely able to afford is something less. Since divorce often leads to significant financial difficulties, this may be a good option.
- Currently not collectible: Again, since divorce can cause significant financial strife, you may find yourself unable to pay anything toward your debt. In that case, the IRS may consider you currently not collectible. This temporarily pauses collection efforts until your financial situation changes.
- Payment plan: An installment agreement may allow you to stretch your tax debt over up to 72 monthly payments. While you’ll still eventually pay off the entire amount, it’s less demanding than paying it all at once.
Frequently Asked Questions
How do I know if I’m eligible for IRS separation of liability relief?
You may qualify for this form of relief if you are divorced or have been separated for at least a year, filed a joint tax return, and did not know of your spouse’s/ex-spouse’s tax return errors.
What is the difference between separation of liability relief and innocent spouse relief?
Innocent spouse relief is a term that covers several forms of relief for spouses who were harmed by their spouse’s tax errors. Innocent spouse relief may also allow spouses to seek relief because their spouse understated their income or otherwise misled them about their tax situation. What makes separation of liability relief different is that it is only for those who are divorced or separated, and you still pay the portion of the tax that came from your personal income.
What documentation is required to apply for separation of liability relief?
You will need to fill out Form 8857 and provide any supporting documentation that shows your involvement—or lack of involvement—with the tax return process.
How long does the IRS take to process a separation of liability relief application?
They respond to requests within six months.
What happens if my application for separation of liability relief is denied?
You have 30 days to appeal the IRS’s decision. If they still deny your request, you can seek alternative forms of relief through the IRS.
Are there any deadlines to apply for separation of liability relief after divorce or separation?
You must submit for an application for relief within two years of receiving the initial notification of your tax liability.
How does the IRS determine the individual tax liabilities under separation of liability relief?
The IRS separates tax liability based on each spouse’s proportion of income, taxes paid, and the amount of the tax liability that is due to the other spouse’s error.
Can separation of liability relief be applied to all types of taxes and penalties?
It can only be used for taxes owed on employment or self-employment income. It cannot be used for household employment taxes, Individual Shared Responsibility payments, business taxes, and trust fund recovery penalties.
What are my options if I’m not eligible for separation of liability relief but still cannot afford to pay the full joint tax liability?
You can look into other relief options, including an offer in compromise, installment agreement, or currently not collectible status.
Get Tax Help Now
If you’re separated or divorced and you’ve been assessed a tax liability due to your spouse’s tax filing errors, you may want to explore separation of liability relief. With the team at Wiggam Law, you can explore this and other solutions to your tax problems. Call us today at (404) 233-9800 or fill out our online consultation form to schedule a consultation.