In the majority of cases, married couples pay less tax when they file jointly. The tax code is written so that higher tax rates tend to kick in at lower levels of income for married couples filing separately. Filing separately also reduces or eliminates many deductions and credits. In addition, filing separately leaves you with a lower alternative minimum tax threshold.
While it may seem that filing jointly is a no brainer, there are some definite disadvantages.
One often overlooked pitfall is that both spouses are 100% responsible for all tax, penalties and interest due, not just the portion attributable to their income and actions. Because of this, if your spouse under reported income and was audited, the IRS has the power to take the full deficiency from you.
The IRS has broad powers of collection. It can garnish wages, levy bank accounts and seize valuable property, such as homes and vehicles. For example, if your spouse underreported income, resulting in a $5,000 tax bill, the IRS could swoop in and take the entire $5,000 from your savings account, even if you knew nothing about your spouse’s activities. This could even happen after separation or divorce.
Thankfully, the IRS recognizes that, in such a case, it would grossly unfair to put the burden on the innocent spouse. For that reason, it offers innocent spouse relief, where the blameless spouse is only responsible for his or her portion of the joint return.
Innocent spouse relief is not automatic. You must apply for it and approval depends on specific criteria. Because the IRS can seize assets, filing for innocent spouse relief is time sensitive. Imagine if your ex-spouse racked up tens of thousands in back taxes and had no ability to pay, while you have savings, investments and a home. With your spouse uncollectable, the IRS could extract all the taxes, interest and penalties from your assets unless you gained approval for innocent spouse relief.
Innocent Spouse Relief Criteria
If you could be on the hook for your spouse’s tax malfeasance, you’ll want to file for innocent spouse relief as soon as possible. You will need to answer several questions to establish your eligibility. To qualify, the following circumstances must apply:
- You and your spouse filed a joint return, and an understatement of tax attributable to your spouse alone was declared. An understatement can result from failure to declare income, the erroneous taking of deductions and credits and inaccurate property basis calculations.
- At the time of filing, you were unaware of the understatement and no reason exists that you should have known.
- Based on the circumstances and facts, holding you liable for the tax understatement would be grossly unfair.
Innocent spouse relief is the best way to preserve your assets from the IRS if your current spouse subjected you to tax liability without your knowledge; however, if you have divorced or legally separated from your spouse, you can protect your property by applying for the separation of liability relief.
The Separation of Liability Relief
The separation of liability relief program allows innocent spouses to owe taxes only on their portion of a joint return. Qualification requires you to have filed a joint return and meet one of the following criteria:
- You are divorced or legally separated from your spouse
- You are widowed
- You have not resided with your spouse in the 12 months prior to the application
- You had no knowledge of your spouses’ improper tax reporting
Taxpayers who do not qualify for innocent spouse relief or separation of liability relief may be able to qualify for equitable relief. A successful application for equitable relief turns on demonstrating that, under the circumstances, holding you responsible would be grossly unfair. The IRS can take into account financial abuse and control by the spouse. This option can work well if you should have known your spouse was reporting inaccurate information but could do nothing about it.
The Bottom Line
Filing jointly provides couples with substantial tax benefits but does come with the danger of being held responsible for any malfeasance committed by your spouse. If your spouse or ex-spouse has misreported information on a joint return, you can be held harmless if you qualify for innocent spouse-, separation of liability- or equitable relief. Because the IRS has broad powers of asset seizure, it’s important to file for relief as soon as possible.
Everyone makes mistakes, but only the one who errs should be held responsible. If you are overwhelmed with tax debt or are struggling with a tax dispute due to your spouse, contact an experienced tax attorney today.
The Law Offices of Peter C. Rageas has been practicing Tax Law Resolution for over 20 years. Our law firm is extremely knowledgeable in the local, state, and federal tax code, as well as vastly experienced in all matters relating to tax resolution, tax dispute, and general issues relating to IRS tax and debt relief. Call today and speak to a tax specialist.