Spouses can file a joint return, and often do so to utilize lower tax brackets and reduce tax liability. However, the privilege of filing a joint tax return carries risk. Filing a joint return entails the spouses assuming joint and several liability (joint liability) for paying a single tax, including interest and penalties. That means that the IRS can go after either spouse for back taxes, interest, and penalties, even if the wrongdoing that led to the tax debt came from only one spouse.
Sacramento tax attorney Jin Kim helps clients obtain innocent spouse relief from the IRS and California Franchise Tax Board. To receive a free consultation and learn more about innocent spouse relief representation call The Law Office of Jin Kim at (916) 299-9913.
Joint Liability for Married Taxpayers
Joint liability means that the innocent spouse can be subject to administrative procedures to assess and collect the tax liability attributable to the other guilty spouse (IRC Section 6013(d)). Of course, this can result in gross inequity when only one spouse is responsible for fraudulent underpayment in tax.
Joint and several liability for the single tax payable on the filing of a joint tax return is absolute. But the liability of a spouse for the deficiency, including penalties, is subject to some rules, such as the exception to the normal three-year period of limitations on assessment where a return is “false or fraudulent with intent to evade tax” that allows assessment of a deficiency against a spouse filing a joint return even if the fraudulent conduct and intent are that of the other joint-filing spouse. Hence, even if the husband is the one whose conduct was fraudulent in filing the return and making the underpayment, the three-year bar of the statute of limitation is still lifted against the wife. She is liable for the deficiency by virtue of the joint and several liability provisions of IRC Section 6013(d)(3).
Suppose one of the spouses is guilty of fraud in filing a joint return as evidenced by a conviction for evasion. In that case, the innocent spouse is not liable for the fraud penalty unless the Commissioner also establishes that he or she also committed fraud. But still, the innocent spouse is liable for the deficiency in tax due to the joint liability rules (IRC Section 6013(d)(3).
Innocent Spouse Rule
Although the rule on joint liability is absolute, a spouse may obtain a limited release from joint liability under Section 6015 of the IRC. The innocent spouse may request limited release from taxes (including interest), penalties, and other amounts. Under the provision, any of the following reliefs from joint liability are available to the innocent spouse provided that he or she satisfies the requirements for relief:
- traditional relief from joint liability under Section 6015(b)
- separate liability election under Section 6015(c)
- equitable relief under Section 6015 (f)
Under the prior law, a spouse may qualify for relief as an innocent spouse; provided that the following are established:
- The spouses filed a joint return for a taxable year.
- A substantial tax understatement on the joint return was attributable to the guilty spouse’s “grossly erroneous items.”
- The innocent spouse had no knowledge and had no reason to know that the tax was substantially understated.
- It is unjust to hold the innocent spouse liable for the additional tax attributable to the substantial understatement of the guilty spouse.
- The innocent spouse elects the benefits of being such not later than two (2) years after the date of the IRS’s collection activities.
The innocent spouse must establish the requirements above to be relieved of tax liability, including interest, penalties, and other amounts that he or she did not know and had no reason to know. The tax liability should be for the taxable year attributable to the portion of the understatement.
Separate Liability Election
A separate liability election is a relief that may be filed by a taxpayer who is no longer married to, is legally separated from, or has been living apart at all times for at least 12 months from the person with whom the taxpayer originally filed the joint tax return. The liability for any deficiency assessed concerning the return shall not exceed the portion allocable to such taxpayer. The taxpayer must elect this relief at any time after a deficiency for such tax year is asserted. However, it must not be later than two (2) years after the date on which the IRS (Secretary of the Treasury or his delegate) has begun collection activities for the individual making the election.
If relief is not available for the innocent spouse under the traditional relief and separate liability election, and it is inequitable to hold him or her liable for any unpaid tax or deficiency, the Secretary may relieve him or her under equitable relief.
The innocent spouse may request relief from the unpaid portion before the expiration of the applicable period of limitation (IRC 6502) or the paid portion of any liability during the period when he or she could submit a timely claim for refund or credit for such payment.