Traditionally, a husband and wife, who both must sign a joint tax return, are equally responsible for paying 100 percent of the taxes owed. In the event of divorce or separation, the IRS goes after both partners for delinquent tax payments. That happens even if one partner had no idea there was additional, even hidden income, or that the vanished ex-spouse lied on the tax return.
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Historically, the innocent spouse claim has evoked tales of the wronged wife, left with a low-paying job and caring for the kids alone only to find out she had a big tax bill because her ex-husband kept a secret bank account while they were married, or that he lied to her about his salary.
The congressional hearings this year to reform the IRS produced some immediate benefits for the marriage partner in a divorce who has been wronged - at least on tax issues. Some newly issued internal letters to IRS collection managers make it clear levy and seizure efforts should be stopped if a taxpayer uses the "innocent spouse" claim to suggest they're not liable for all the tax due.
The IRS is still developing regulations to meet the innocent spouse changes. But if a taxpayer in imminent danger of some collection enforcement such as garnished wages or a levy of a bank account or house, makes a claim as an innocent spouse, the IRS is likely to suspend the collection, at least until the new rules are clarified, according to one IRS insider.
The IRS has been providing written guidance and even training to field collection staff and auditors on how to proceed when confronted with a claim.
The old rule on innocent spouse has been expanded. Under the old rules, if there was a joint tax return with a substantial understatement of tax, the item had to be "grossly erroneous" for the wronged spouse to make a claim. The innocent spouse also had to prove they didn't know, or have a reason to know, about the understatement when they signed the return.
The new rules allow the taxpayer to claim relief from the tax obligation three different ways. The law completely removed the "grossly" erroneous requirement and left simply "erroneous." That lowers the dollar threshold to qualify fothe claim.
If a spouse knew their ex-partner was shaving the amount of taxes owed but found out the figure was far worse than expected, it may be possible to claim innocent spouse relief for a portion of the tax. Or this provision allows the innocent spouse to work out paying their pro rata share of the tax, based on their share of income, rather than 100 percent of the bill.
And finally, the IRS will offer equitable relief. If the taxpayer can't use the first two rules then the IRS will take the circumstances of a particular case into account and consider a claim for equitable division of the tax bill.
The IRS expects to develop the new regulations and put its internal procedures in place within the next six months. One problem it's trying to deal with is that, the old Form 8857, Request for Innocent Spouse Relief, still uses the outdated "grossly erroneous" understatement of tax. The new form is still in the works.
As a stop-gap measure, the IRS is including a separate instruction, Notice 1213, to tell taxpayers to cross out the word "grossly" where ever it appears on the old form.
There are still some drawbacks to the rules. The wronged spouse still has to prove he or she didn't know about the hidden income and didn't get any benefit from the money. Some people have also confused "injured spouse" claims with innocent spouse. These are very different issues.
An injured spouse is typically someone who has a tax refund coming but has it held to pay off the debt their partner incurred prior to marriage. This may be a student loan, child support for a prior marriage, a Veteran's Administration loan or past due taxes.
An injured spouse, particularly in community property states, could not get back the money. Now those rules have been relaxed, even in the community property states. If your refund got side-tracked to pay back a debt your wife or husband racked up prior to your marriage, file a Form 8379 as an injured spouse.
The only exception? You guessed it - taxes. If your partner failed to pay Uncle Sam prior to your marriage, the honeymoon is over. Uncle still can take his money out of your tax refund check.
Written By Pam MacLean