Publication 971 |
2001 Tax Year |
Relief by Separation of Liability
Under this type of relief, you allocate (divide) the understatement
of tax (plus interest and penalties) on your joint return between you
and your spouse (or former spouse). The understatement of tax
allocated to you is generally the amount you are responsible for. See
How To Figure Your Separation of Liability, later.
You can request this type of relief whether or not you request
innocent spouse relief.
To request relief by separation of liability, you must have filed a
joint return and meet either of the following requirements
at the time you file Form 8857.
- You are no longer married to, or are legally separated from,
the spouse with whom you filed the joint return for which you are
requesting relief. (Under this rule, you are no longer married if you
are widowed.)
- You were not a member of the same household as the spouse
with whom you filed the joint return at any time during the 12-month
period ending on the date you file Form 8857.
Burden of proof.
You have the burden of proof in establishing the basis for
separating your liability.
Invalid request.
Even if you meet the requirements discussed previously, a request
for separation of liability will not be granted in the
following situations.
- The IRS proves that you and your spouse transferred assets
as part of a fraudulent scheme.
- The IRS proves that at the time you signed your joint
return, you had actual knowledge of any items giving rise to the
deficiency that were allocable to your spouse.
- Your spouse (or former spouse) transferred property to you
to avoid tax or the payment of tax. See Transfers of property to
avoid tax, later.
In situations (2) and (3), a request will be denied only for
the part of the deficiency due to the incorrect items about which you
had actual knowledge, or to the extent of the value of the property
transferred. If you establish that you signed your joint return under
duress, then it is not a joint return, and you are not liable for
amounts from that return. However, you may be required to file a
separate return for that tax year.
Example.
Bill and Karen Green filed a joint return showing Karen's wages of
$50,000 and Bill's self-employment income of $10,000. The IRS audited
their return and found that Bill did not report $20,000 of
self-employment income. The additional income resulted in a $6,000
understatement of tax, plus interest and penalties. After obtaining a
legal separation from Bill, Karen filed Form 8857 to request relief by
separation of liability. The IRS proved that Karen actually knew about
the $20,000 of additional income at the time she signed the joint
return. Bill is liable for all of the understatement of tax, interest,
and penalties because all of it was due to his unreported income.
Karen is also liable for the understatement of tax, interest, and
penalties due to the $20,000 of unreported income because she actually
knew of the item. The IRS can collect the entire deficiency from
either Karen or Bill.
Transfers of property to avoid tax.
If your spouse transfers property to you for the main purpose of
avoiding tax or payment of tax, the tax liability allocated to you
will be increased by the value of the property transferred. A transfer
will be presumed to have as its main purpose the avoidance of tax or
payment of tax if the transfer is made after the date that is 1 year
before the date on which the IRS sent its first letter of proposed
deficiency allowing you an opportunity for a meeting in the IRS
Appeals Office. This presumption will not apply if the transfer was
made under a divorce decree, separate maintenance agreement, or a
written instrument incident to such an agreement. The presumption will
also not apply if you establish that the transfer did not have as its
main purpose the avoidance of tax or payment of tax.
How To Figure Your Separation of Liability
The IRS will figure your separation of liability and figure any
related interest and penalties after you file a completed Form 8857
with the required attachment. You are not required to figure
these amounts. But if you wish, you can figure your separation
of liability yourself by using Worksheet 1 and instructions that
follow. However, if you filed Form 8814 to report your child's tax
liability on your joint return, do not include that liability when
figuring your separation of liability. Allocate it as appropriate
between you and your spouse. Also do not include household employment
taxes that are reported on Form 1040.
Instructions for Completing Worksheet 1
Use the following instructions to complete Worksheet 1.
Worksheet for Figuring Your Separation of Liability.
Line 1.
When allocating income and deductions taken into account in
computing the understatement of tax, allocate them in the same manner
you would have allocated them if you and your spouse had filed
separate returns.
Allocate wages and salaries to the spouse who performed the
services and received the Form W�2. You generally allocate business
and investment income (including capital gains) according to which
spouse owned the business or investment that produced the income.
Income from a jointly owned business or investment should be allocated
equally between you and your spouse unless there is evidence that
shows a different allocation is appropriate.
Allocate business deductions according to the ownership of the
business. Allocate personal deductions (such as itemized deductions
for mortgage interest and taxes) equally between you and your spouse
unless there is evidence that shows a different allocation is
appropriate, or the IRS establishes that you had actual knowledge of
the joint items.
Items that are limited or not allowed on separate returns.
If a deduction would not be allowed if you had filed a separate
return, figure the deduction as you would on a joint return and
allocate that amount between you and your spouse.
A similar rule applies to income and deductions (such as taxable
social security benefits and the IRA deduction) that are subject to
special limits on a separate return. Figure these items as you would
on a joint return and allocate them between you and your spouse.
Example.
Charles and Mary filed a joint return for 1998. Charles received
social security benefits in 1998, but none of them were taxable
because his and Mary's total income was less than the base amount
($32,000) for joint returns. Several months after filing their return,
Charles and Mary received a notice from the IRS for additional tax
because they did not report some interest and dividend income. The
notice also showed that half of Charles' social security benefits were
taxable because the additional interest and dividend income increased
their total income so that it was more than the $32,000 base amount.
If Charles had filed a separate return, 85% of his social security
benefits would have been taxable. When figuring his separation of
liability, Charles allocates only half of his social security
benefits. This is true even though 85% of his benefits would have been
taxable if he and Mary had filed separate returns.
Items allocable to one spouse that benefit the other spouse.
An item that is otherwise allocable to one spouse must be allocated
to the other spouse to the extent the item created a tax benefit on
the return for the other spouse. This does not relieve the first
spouse of liability. Rather, both spouses will be jointly and
severally liable for the item to the extent of the benefit received.
Example.
Your joint return shows $50,000 of wages allocable to you and
$15,000 of self-employment income allocable to your spouse. The IRS
audited your return and disallowed a $20,000 business deduction
allocable to your spouse. Only $15,000 of the disallowed deduction
offset your spouse's self-employment income. The remaining $5,000 must
be allocated to you because that amount offset your income.
Lines 5 and 6.
Enter the part of the understatement of tax that is due to the
disallowance of a credit or to the increase in any tax other than
the income tax or alternative minimum tax. Allocate credits and
other taxes in the same manner you would have allocated them if you
and your spouse had filed separate returns.
Example.
You reported $750 in self-employment tax on your return. All of
this tax is allocable to you. The IRS audited your return and
determined that your self-employment tax should have been $1,100. On
line 6, you enter the $350 increase in self-employment tax ($1,100
- $750).
Credits that are not allowed on separate returns.
If a credit would not be allowed if you had filed a separate
return, figure the credit as you would on a joint return and allocate
it between you and your spouse. Examples of credits that are generally
not allowed on a separate return are the child and dependent care
credit, the credit for the elderly, the adoption credit, the Hope and
lifetime learning credits, and the earned income credit.
Example.
You claimed a credit of $860 for child and dependent care expenses
on your tax return. The IRS audited your return and allowed you only
$500. The remaining $360 was disallowed. Even though none of the
credit would have been allowed on separate returns, you are entitled
to a $500 credit for purposes of figuring your separation of
liability. You allocate the $360 disallowance (rather than the full
$860) between you and your spouse (or former spouse) on lines 5 and 6
of Worksheet 1.
Credits allocable to one spouse that benefit the other
spouse.
A credit that is otherwise allocable to one spouse must be
allocated to the other spouse to the extent the item created a tax
benefit on the return for the other spouse. This does not relieve the
first spouse of the liability. Rather, both spouses will be jointly
and severally liable for the item to the extent of the benefit
received.
Example.
Tom and Donna filed a joint return that showed $30,000 of wages
attributable to Tom and a $1,000 lifetime learning credit attributable
to Donna. The lifetime learning credit was for Donna's graduate
tuition expenses. Since Donna had no income, the entire credit offset
$1,000 of Tom's income tax on the return. Tom received the tax benefit
on the return from the entire credit. The IRS audited their return and
disallowed $400 of the credit. Tom and Donna remain jointly and
severally liable for the $400 deficiency. It was Donna's item and Tom
received a $400 tax benefit.
Worksheet 1 Example
Cindy and Clarence Brown filed a joint return for 1997. They
divorced in 1998. On July 27, 1999, the IRS issued a Notice of
Deficiency to the Browns relating to their 1997 return. There were
four items listed on the notice.
- $2,378 is nonemployee compensation that Clarence got for
some consulting work and did not report.
- $336 is self-employment tax related to the $2,378
nonemployee compensation.
- $168 is the deduction for half of the self-employment
tax.
- $500 is interest income from Cindy's bank account.
Cindy decides to file Form 8857 (not illustrated) to request relief
under separation of liability. She allocates the items between her and
Clarence as follows and attaches this allocation to Form 8857.
Items to allocate |
Cindy |
Clarence |
Nonemployee
compensation |
|
$ 2,378 |
___________________________ |
Interest income |
$ 500 |
|
___________________________ |
Deduction for 1/2 of
self-employment tax |
|
168 |
___________________________ |
Self-employment tax |
|
336 |
Although not required, Cindy uses Worksheet 1 to determine the
understatement of tax that is allocable to her. She fills out the
worksheet (shown on page 8) as follows.
Line 1.
Cindy enters the interest income from her bank account.
Line 2.
The net amount of income and deductions taken into account in
computing the understatement of tax is $2,710. This is the sum of the
nonemployee compensation, $2,378, and interest income, $500, minus the
deduction for one-half of self-employment tax, $168.
Line 3.
Cindy divides line 1 by line 2 to get .185.
Line 4.
Cindy enters the $743 understatement of tax. This is shown on the
Notice of Deficiency.
Line 5.
Cindy enters Clarence's self-employment tax of $336.
Line 6.
Cindy enters -0- because there are no credits or other
taxes to be allocated to her.
Lines 7-10.
Cindy completes lines 7 through 10. Line 10 shows that she is
responsible for $75 of the understatement of tax. Clarence is
responsible for the remaining amount ($668).
Filled-in Worksheet for Figuring Your Separation of Liability.
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