| Publication 971 |
2003 Tax Year |
Publication 971
Main Contents
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
How To Request Relief
File Form 8857 or similar statement signed under penalties of perjury to ask the IRS for the types of relief discussed in
this publication. You
only need to file one Form 8857 even if you are requesting relief for more than one tax year.
You must attach a statement to Form 8857 explaining why you believe you qualify for relief. You must also provide certain
information for each type
of relief you are requesting. See the instructions for Form 8857 for more information.
You can help the processing of your request by completing Form 12510, Questionnaire for Requesting Spouse, and attaching it
to Form 8857. To get Form 12510, go to www.irs.gov or call 1–800–TAX–FORM (1–800–829–3676).
The IRS will review your Form 8857, figure the understatement or underpayment of tax and related interest and penalties, and
let you know if you
qualify.
A completed Form 8857 is shown later.
When to file Form 8857.
You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or
former spouse should be held
liable. The following are some of the ways you may become aware of such a liability.
-
The IRS is examining your tax return and proposing a deficiency.
-
The IRS sends you a notice.
You must file Form 8857 no later than 2 years after the date on which the IRS first attempted to collect the tax from
you after July 22, 1998.
Examples of attempts to collect the tax from you are garnishment of your wages and applying your refund in a later year to
the tax due.
IRS spousal notification.
The IRS informs your spouse (or former spouse) if you request relief from joint and several liability on a joint return,
and allows your spouse (or
former spouse) to participate in the determination of the amount of relief from liability. The IRS must also inform your spouse
of its preliminary and
final determination regarding your request for relief.
Form 8857 filed by or on behalf of a decedent.
An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's
lifetime. An executor (including
any other duly appointed representative) may also file Form 8857 as long as the decedent had satisfied the eligibility requirements
while alive. For
purposes of relief by separation of liability (discussed later), the decedent's marital status is determined on the earlier
of the date relief was
requested or the date of death.
Situations in which you are not entitled to relief.
You are not entitled to innocent spouse relief for any tax year to which the following situations apply.
-
A court of competent jurisdiction has issued a final decision on your tax liability in a prior proceeding and innocent spouse
relief was an
issue in that proceeding, or you meaningfully participated in that proceeding and could have requested innocent spouse relief.
-
You entered into an offer in compromise with the IRS.
-
You entered into a closing agreement with the IRS that disposed of the same liability for which you want to claim relief.
Exception for agreements relating to TEFRA partnership proceedings.
The unavailability of relief in (3) does not apply to an agreement relating to partnership items that you entered
into while you were a party to a
TEFRA partnership proceeding. (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1992” that
prescribed the tax treatment of partnership items.) However, (3) will apply to the extent explained below.
-
If you entered into a closing agreement pertaining to tax, penalty, or interest relating to adjustments to partnership items,
at a time when
you were not a party to a pending TEFRA partnership proceeding, then you are not entitled to innocent spouse relief.
-
If you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending
TEFRA
partnership proceeding, you are not entitled to innocent spouse relief for the nonpartnership items. But you will be entitled
to relief for the
partnership items (if you otherwise qualify).
Transferee liability not affected by innocent spouse relief provisions.
The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability
or property laws.
Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable
for the unpaid tax,
interest, and penalties to the extent provided by these laws.
Example.
Herb and Wanda timely filed their 2000 joint income tax return on April 16, 2001. Herb died in March 2002, and the executor
of Herb's will
transferred all of the estate's assets to Wanda. In April 2003, the IRS assessed a deficiency for the 2000 return. The items
causing the deficiency
belong to Herb. Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains
solely liable for it.
However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability
or property laws.
Tax Court Review of Request
After you file Form 8857, you can ask the United States Tax Court to review your request. You can ask the United States Tax
Court to review your
request in the following two situations.
-
You disagree with the IRS' final determination notice telling you the extent to which your request for relief has been denied.
-
You do not receive a final determination notice from the IRS within 6 months from the date you filed Form 8857.
The United States Tax Court is an independent judicial body and is not part of the IRS.
You must file a petition with the United States Tax Court in order for it to review your request for relief. You must file
the petition no
later than the 90th day after the date the IRS mails its final determination notice to you. If you do not file a petition, or you file it late,
the Tax Court cannot review your request for relief.
You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address.
United States Tax Court
400 Second Street, NW
Washington, DC 20217
Or you can visit the Tax Court's web site at www.ustaxcourt.gov.
Community Property Laws
You must generally follow community property laws when filing a tax return if you are married and live in a community property
state. Community
property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally,
community property laws
require you to allocate community income and expenses equally between both spouses. However, community property laws are not
taken into account in
determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from
liability.
Married persons who did not file joint returns in community property states have two ways to get relief.
Relief from liability arising from community property law.
You are not responsible for the tax relating to an item of community income if all the following conditions exist.
-
You did not file a joint return for the tax year.
-
You did not include an item of community income in gross income.
-
You establish that you did not know of, and had no reason to know of, that community income.
-
Under all facts and circumstances, it would not be fair to include the item of community income in your gross income.
Equitable relief.
If you do not qualify for the relief described above and are now liable for an underpayment or understatement of
tax you believe should be paid
only by your spouse (or former spouse), you may request equitable relief (discussed later).
Requesting relief.
You request relief from liability arising from community property law by filing Form 8857, as discussed earlier. Fill
in Form 8857 according to the
instructions.
Innocent Spouse Relief
By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your
spouse improperly
reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can
only be collected from
your spouse. However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify
for relief. The IRS can
collect these amounts from either you or your spouse.
The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount.
But if you wish, you can
figure it yourself. See How to Allocate the Understatement of Tax later.
You must meet all of the following conditions to qualify for innocent spouse relief.
-
You filed a joint return which has an understatement of tax due to erroneous items (defined later) of your
spouse.
-
You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an
understatement of
tax. (See Actual Knowledge or Reason to Know, later.)
-
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
(See
Indications of Unfairness for Innocent Spouse Relief, later.)
A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse transferred property to one another
as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a
creditor, ex-spouse, or
business partner.
Understatement of Tax
An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return
and the amount of
tax that was actually shown on your return.
Erroneous Items
Erroneous items are either of the following.
-
Unreported income. This is any gross income item received by your spouse that is not reported.
-
Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your
spouse.
The following are examples of erroneous items.
-
The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer,
deducted $10,000
of advertising expenses on Schedule C (Form 1040), but never paid for any advertising.
-
The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000
that was for the
payment of state fines. Fines are not deductible.
-
No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security
costs
related to a home office, which were actually veterinary and food costs for your family's two dogs.
Actual Knowledge or Reason To Know
You knew or had reason to know of an understatement if:
-
You actually knew of the understatement, or
-
A reasonable person in similar circumstances would have known of the understatement.
Actual knowledge.
If you actually knew about an erroneous item that belongs to your spouse, the relief discussed here does not apply
to any part of the
understatement of tax due to that item. You and your spouse remain jointly liable for that part of the understatement. For
information about the
criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Relief by Separation of
Liability.
Reason to know.
If you had reason to know about an erroneous item that belongs to your spouse, the relief discussed here does not
apply to any part of the
understatement of tax due to that item. You and your spouse remain jointly liable for that part of the understatement.
The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement
of tax due to an erroneous
item. The facts and circumstances include:
-
The nature of the erroneous item and the amount of the erroneous item relative to other items.
-
The financial situation of you and your spouse.
-
Your educational background and business experience.
-
The extent of your participation in the activity that resulted in the erroneous item.
-
Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return
that a
reasonable person would question.
-
Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example,
omitted income
from an investment regularly reported on prior years' returns).
Partial relief when portion of erroneous item is unknown.
You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of
only a portion of an erroneous
item. You will be relieved of the understatement due to that portion of the item if all other requirements are met for that
portion.
Example.
At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. The IRS examined
your tax return
several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. You
established that you did
not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings.
The understatement
of tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. The understatement of
tax due to the $5,000 of
gambling winnings will not qualify for relief.
Indications of Unfairness for Innocent Spouse Relief
The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you
responsible for the
understatement.
The following are examples of factors the IRS will consider.
-
Whether you received a significant benefit (defined next), either directly or indirectly, from the understatement.
-
Whether your spouse deserted you.
-
Whether you and your spouse have been divorced or separated.
-
Whether you received a benefit on the return from the understatement.
For other factors, see Indications of unfairness for equitable relief later under Equitable Relief.
Significant benefit.
A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances.
Evidence of a direct or
indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several
years after the year of
the understatement.
Example.
You receive money from your spouse that is beyond normal support. The money can be traced to your spouse's lottery winnings
that were not reported
on your joint return. You will be considered to have received a significant benefit from that income. This is true even if
your spouse gives you the
money several years after he or she received it.
Relief by Separation of Liability
Under this type of relief, you allocate (separate) 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 Allocate
the Understatement of Tax, later.
This type of relief is available only for unpaid liabilities resulting from understatements of tax. Refunds are not allowed.
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 (explained next) 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.
Members of the same household.
You and your spouse are not members of the same household if you are living apart and are estranged. However, you and your spouse
are considered members of the same household if any of the following conditions are met.
-
You and your spouse reside in the same dwelling.
-
You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's
household as
explained in (3) below.
-
Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to
the household,
and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Examples
of temporary absences
include absence due to imprisonment, illness, business, vacation, military service, or education.
Burden of proof.
You must be able to prove that you meet all of the requirements for separation of liability (except actual knowledge)
and that you did not transfer
property to avoid tax (discussed later). You must also establish the basis for allocating the erroneous items.
Limitations on Relief
Even if you meet the requirements discussed previously, a request for relief by separation of liability will not be granted in the
following situations.
-
The IRS proves that you and your spouse transferred assets to one another as part of a fraudulent scheme. A fraudulent scheme
includes a
scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
-
The IRS proves that at the time you signed your joint return, you had actual knowledge (explained next) of any erroneous items
giving rise
to the deficiency that were allocable to your spouse. For the definition of erroneous items, see Erroneous Items earlier under
Innocent Spouse Relief.
-
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.
Actual Knowledge
The relief discussed here does not apply to any part of the understatement of tax due to your spouse's erroneous items of
which you had actual
knowledge. You and your spouse remain jointly and severally liable for this part of the understatement.
If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the
item.
You had actual knowledge of an erroneous item if:
-
You knew that an item of unreported income was received. (This rule applies whether or not there was a receipt of cash.)
-
You knew of the facts that made an incorrect deduction or credit unallowable.
-
For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the
tax
return.
Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Also, your actual knowledge
may not be inferred when
you merely had a reason to know of the erroneous item. Similarly, the IRS does not have to establish that you knew of the
source of an erroneous item
in order to establish that you had actual knowledge of the item itself.
Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that
you had actual knowledge
of that item. Neither is your actual knowledge of how the erroneous item was treated on the tax return. For example, if you
knew that your spouse
received dividend income, relief is not available for that income even if you did not know it was taxable.
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.
Factors supporting actual knowledge.
The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the
time you signed the return.
The following are examples of factors the IRS may use.
-
Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability.
-
Whether you and your spouse jointly owned the property that resulted in the erroneous item.
Domestic abuse exception.
Even if you had actual knowledge, you may still qualify for relief if you establish that:
-
You were the victim of domestic abuse before signing the return, and
-
Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse
would retaliate
against you.
If you establish that you signed your joint return under duress, then it is not a joint return, and you are not liable
for any tax shown on that
return or any tax deficiency for that return. However, you may be required to file a separate return for that tax year.
Transfers of Property To Avoid Tax
If your spouse transfers property (or the right to 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 fair market value of the property on the date of the transfer. The increase may
not be more than the entire
amount of the liability. 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. 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.
If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or
payment of tax, the tax
liability allocated to you will be increased as explained above.
Equitable Relief
The IRS is in the process of updating the equitable relief rules.
If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from
community property law,
you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If you request innocent
spouse relief or
separation of liability, and the IRS determines you do not qualify for either one, the IRS automatically will consider whether
equitable relief is
appropriate.
You may qualify for equitable relief if you meet all of the following conditions.
-
You are not eligible for innocent spouse relief, relief by separation of liability, or relief from liability arising from
community property
law.
-
You and your spouse did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes
a scheme to
defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
-
Your spouse did not transfer assets to you for the main purpose of avoiding tax or the payment of tax. See Transfers of Property To
Avoid Tax, earlier, under, Relief by Separation of Liability.
-
You did not file your return with the intent to commit fraud.
-
You did not pay the tax. However, you may be able to receive a refund of certain installment payments made after you file
Form
8857.
-
You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement
or
underpayment of tax. See Indications of unfairness for equitable relief, later.
Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax (defined earlier
under Innocent Spouse Relief) or an underpayment of tax (defined next).
Underpayment of tax.
An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example,
your joint 2001 return shows
that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.
Indications of unfairness for equitable relief.
The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible
for the understatement
or underpayment of tax. The following are examples of positive and negative factors that the IRS will consider to determine
whether to grant equitable
relief. The IRS will consider all factors and weigh them appropriately.
Positive factors.
The following are examples of factors that weigh in favor of equitable relief.
-
You are separated (whether legally or not) or divorced from your spouse.
-
You would suffer economic hardship if relief is not granted. (In other words, you would not be able to pay your reasonable
basic living
expenses.)
-
You were abused by your spouse, but the abuse did not amount to duress.
-
You did not know and had no reason to know about the items causing the understatement or that the tax would not be paid.
-
Your spouse has a legal obligation under a divorce decree or agreement to pay the tax. (This will not be a positive factor if you
knew or had reason to know, at the time the divorce decree or agreement was entered into, that your spouse would not pay the
tax.)
-
The tax for which you are requesting relief is attributable to your spouse.
Negative factors.
The following are examples of factors that weigh against equitable relief.
-
You will not suffer economic hardship if relief is not granted.
-
You knew or had reason to know about the items causing the understatement or that the tax would be unpaid at the time you
signed the
return.
-
You received a significant benefit from the unpaid tax or items causing the understatement. (For a definition of significant
benefit, see
Indications of Unfairness for Innocent Spouse Relief, on page 4.)
-
You have not made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting
relief or the
following years.
-
You have a legal obligation under a divorce decree or agreement to pay the tax.
-
The tax for which you are requesting relief is attributable to you.
Example.
You and your spouse filed a joint 2001 return. That return showed you owed $10,000. You had $5,000 of your own money and you
took out a loan to pay
the other $5,000. You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Without telling you, your
spouse took the $5,000 loan
and spent it on himself. You and your spouse were divorced in 2002. In addition, you had no knowledge or reason to know at
the time you signed the
return that the tax would not be paid. Both of these facts indicate to the IRS that it may be unfair to hold you liable for
the $5,000 underpayment.
The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you
equitable relief from the
$5,000 underpayment.
How To Allocate the Understatement of Tax
The IRS will figure your portion of the tax, 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 portion of the tax using Worksheet A and the instructions that
follow.
Instructions for Completing Worksheet A
Use the following instructions to complete Worksheet A.
Line 1, Column (a)
When allocating income and deductions taken into account in computing the understatement of tax, you generally allocate them
in the same manner you
would have allocated them if you and your spouse had filed separate returns. Enter the items allocable to you in column (a).
However, see the
instructions for line 1, column (b), later for items that must be entered in that column instead of in column (a).
Income.
Allocate wages and salaries to the spouse who performed the services and received the Form W–2. You generally allocate
business or investment
income according to which spouse owned the business or investment that produced the income. This rule also applies to capital
gains, but see
Allocating items subject to different tax rates next. If both spouses owned an interest in the business or investment, allocate the income
in proportion to each spouse's ownership interest. Income from jointly-owned property should be allocated equally between
you and your spouse unless
there is evidence that shows a different allocation is appropriate. If you knew about the income from jointly-owned property,
enter the income in
column (b) to the extent you knew about it.
Allocating items subject to different tax rates.
You must use an alternative allocation method if the understatement of tax arises from two or more erroneous items
that are subject to tax at
different rates. This situation will occur, for example, if you have ordinary income (such as wages or interest) and capital
gains. First separate the
erroneous items into categories according to their applicable tax rate. Then make a separate allocation for each tax rate
category using a separate
Worksheet A for each category.
Example.
Wendy and Hal filed a joint return for 2000. They divorced in 2001. In August 2002, the IRS audited their 2000 return and
determined that they owe
an additional $5,100 in income tax. Of this amount, $2,000 is attributable to an unreported net capital gain of $10,000 that
is subject to a 20% tax
rate. The remaining $3,100 is attributable to unreported interest and dividend income of $10,000 subject to a 31% marginal
tax rate. Neither Wendy nor
Hal had actual knowledge of the other spouse's erroneous items.
A breakdown of erroneous items by tax rates and ownership is shown next.
Hal decides to request relief by separation of liability. He must complete two Worksheets A because each item that belongs
to him is subject to
different tax rates. On Worksheet A for the 20% rate category, Hal enters $6,000 on line 1 in column (a); $10,000 on line
2; .60 on line 3 in column
(a); and $2,000 on line 4. He completes the rest of Worksheet A as appropriate. On Worksheet A for the 31% rate category,
he enters $3,000 on line 1,
column (a); $10,000 on line 2; .30 on line 3 in column (a); and $3,100 on line 4. He completes the rest of Worksheet A as
appropriate.
Worksheet A. Allocating the Understatement of Tax
(Note: This worksheet is optional. Keep it for your records. Do not mail it to the IRS.)
| |
(a)
Your Items
|
(b)
Joint Items
|
| 1. |
Enter the net amount of income and deductions that are (1) taken into account in computing the
understatement of tax and (2) allocated to you or allocated jointly to you and your spouse. See instructions.
|
1. |
1. |
2.
|
Enter the net amount of all income and deductions taken into account in computing the understatement of tax.*
|
2. |
|
3.
|
Divide line 1 by line 2. Enter the result as a decimal (rounded to at least 3 places).
|
3. |
3. |
4.
|
Enter the understatement of tax.*
|
4. |
|
5.
|
Enter the credits and other taxes taken into account in computing the understatement of tax. See instructions.
|
5. |
| 6. |
Subtract line 5 from line 4.
|
6. |
| 7. |
Multiply line 6 by line 3.
|
7. |
7. |
8.
|
Enter the credits and other taxes that are (1) taken into account in computing the understatement of tax and (2) allocated to you or
allocated jointly to you and your spouse. See instructions.
|
8. |
8. |
9.
|
Add lines 7 and 8. The total of columns (a) and (b) is the understatement of tax you are responsible for
|
9. |
9. |
| |
Note: Subtract this total from line 4 to get the understatement of tax that qualifies for
relief.
|
|
Income subject to special limits on separate returns.
If the income (such as taxable social security benefits) is subject to special limits on a separate return, figure
the income as you would on a
joint return and allocate it between you and your spouse.
Example.
Charles and Mary filed a joint return for 2001. Charles received social security benefits in 2001, 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.
Deductions.
Allocate deductions related to a business or investment according to the same allocation rules that apply to income.
Allocate deductions unrelated
to a business or investment (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.
Deductions that are limited or not allowed on a separate return.
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 deductions (such as 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.
Line 1, Column (b)
Enter in column (b) the income and deductions allocated jointly to you and your spouse. Do not enter them in column (a). For example,
enter the following items in column (b).
-
Items allocable to your spouse that create a tax benefit for you.
-
Erroneous items you knew about.
Items allocable to your spouse that create a tax benefit for you.
An item that is otherwise allocable to your spouse must be allocated to you to the extent the item created a tax benefit
on the return for you.
This does not relieve your 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.
Erroneous items you knew about.
Include in column (b) any erroneous items relating to jointly-owned property and erroneous items allocable to your
spouse to the extent you
actually knew about them. If you are requesting innocent spouse relief (discussed on page 3), also include these erroneous
items to the extent you had
reason to know about them. You and your spouse are jointly and severally liable for the tax on these items.
Example 1.
You and your spouse received $4,000 of interest income from a joint bank account that was not reported on your joint return.
You must include
$4,000 in column (b). Do not include it in column (a).
Example 2.
Your spouse received $3,000 in gambling winnings that were not reported on your joint return. You actually knew about $1,000
of those winnings. You
must include $1,000 in column (b). Do not include any of these winnings in column (a).
Line 5
Enter the part of the understatement of tax that resulted from an adjustment to a credit. Also enter any adjustments to your
child's tax liability
that you elected to report on your joint return and any tax other than the income tax. For example, enter any adjustments to the following
taxes.
-
Alternative minimum tax.
-
Household employment taxes.
-
Recapture of the investment credit, low-income housing credit, qualified electric vehicle credit, Indian employment credit,
and new markets
credit.
-
Recapture of federal mortgage subsidy.
-
Section 72(m)(5) excess benefits tax.
-
Self-employment tax.
-
Social security and Medicare tax on tip income not reported to employer.
-
Additional tax on early distributions from an IRA, qualified retirement plan, annuity, or modified endowment contract entered
into after
June 20, 1988.
-
Additional tax on taxable distributions from Coverdell education savings accounts (formerly Ed IRAs) or qualified tuition
programs.
-
Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical
savings
accounts).
-
Tax on excess accumulation in qualified retirement plans.
-
Tax on golden parachute payments.
-
Tax on accumulation distribution of trusts.
-
Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance.
Line 8, Column (a)
You generally allocate credits and other taxes in the same manner you would have allocated them if you and your spouse had
filed separate returns.
Enter the items allocable to you in column (a). However, see the instructions for line 8, column (b), later for items that
must be entered in that
column instead of in column (a).
Example.
You reported $750 in self-employment tax on your return. The IRS audited your return and determined that your self-employment
tax should have been
$1,100. All of this tax is allocable to you. In column (a), you enter the $350 increase in self-employment tax ($1,100–$750).
Child's tax liability reported on your joint return.
If you elected to report your child's tax liability on your joint return by filing Form 8814, include this liability
in column (a) only
if the child is your child only and was not legally adopted by the spouse with whom you filed the joint return. Otherwise, see
the instructions
for line 8, column (b) to see if you must include your child's tax liability in that column.
Alternative minimum tax.
Enter your share of the understatement of tax that is due to alternative minimum tax (AMT), if any. Figure your share
of AMT by using the following
formula.
| |
Your Share of the Alternative Minimum Taxable Income as Recomputed by the IRS |
x |
Understatement of Tax Due to AMT |
|
| |
Total Alternative Minimum Taxable Income as Recomputed by the IRS |
|
| |
|
|
|
|
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 or the disabled, the adoption credit, the education credits, and the earned income credit.
Example.
You claimed a credit of $860 for child and dependent care expenses on your joint 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).
Line 8, Column (b)
Enter in column (b) the credits and other taxes allocated jointly to you and your spouse. Do not enter them in column (a). For example,
enter the following items in column (b).
-
Credits allocable to your spouse that create a tax benefit for you.
-
Erroneous items you knew about.
-
Your child's tax liability that you elected to report on your joint return by filing Form 8814. However, if one of you is
the child's
stepparent, enter this liability in column (b) only if the stepparent legally adopted the child.
-
Household employment taxes.
Credits allocable to your spouse that create a tax benefit for you.
A credit that is otherwise allocable to your spouse must be allocated to you to the extent the item created a tax
benefit on the return for you.
This does not relieve your 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.
Erroneous items you knew about.
Include in column (b) any erroneous items allocable to your spouse to the extent you actually knew about them. If
you are requesting innocent
spouse relief (discussed on page 3), also include erroneous items allocable to your spouse to the extent you had reason to
know about them. You and
your spouse are jointly and severally liable for the tax on these items.
Example.
Your spouse prepared your joint return and claimed a credit for child and dependent care expenses. The IRS audited your return
and disallowed the
credit because your spouse never paid any child or dependent care expenses. In fact, the expenses were actually for kennel
fees for boarding your dogs
during a family vacation. At the time you signed the return, you actually knew that the expenses were for kennel fees. You
must include the disallowed
credit in column (b). Do not include it in column (a).
Worksheet A Example
Cindy and Clarence Brown filed a joint return for 2001. They divorced in 2002. On April 30, 2003, the IRS issued a Notice
of Deficiency to the
Browns relating to their 2001 return. There were four items listed on the notice.
-
$2,378 is nonemployee compensation that Clarence received 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 ½ of
self-employment tax
|
|
168 |
|
| Self-employment tax |
|
336 |
|
Although not required, Cindy uses Worksheet A to determine the understatement of tax that is allocable to her. She fills out
the worksheet (shown
on page 12) as follows.
Line 1.
Cindy enters the interest income from her bank account in column (a).
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 column (a) by line 2 to get .185. She enters this amount on line 3 in column (a).
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.
Lines 6–9.
Cindy completes lines 6 through 9. Line 9 shows that she is responsible for $75 of the understatement of tax.
Worksheet A. Allocating the Understatement of Tax—Illustration for Cindy and Clarence Brown's Example
(Note: This worksheet is optional. Keep it for your records. Do not mail it to the IRS.)
| |
(a)
Your Items
|
(b)
Joint Items
|
| 1. |
Enter the net amount of income and deductions that are (1) taken into account in computing the
understatement of tax and (2) allocated to you or allocated jointly to you and your spouse. See instructions
|
1.500 |
1. 0 |
2.
|
Enter the net amount of all income and deductions taken into account in computing the understatement of tax.*
|
2.2,710 |
|
3.
|
Divide line 1 by line 2. Enter the result as a decimal (rounded to at least 3 places)
|
3..185 |
3.0 |
4.
|
Enter the understatement of tax.*
|
4.743 |
|
5.
|
Enter the credits and other taxes taken into account in computing the understatement of tax. See instructions
|
5.336 |
| 6. |
Subtract line 5 from line 4
|
6.407 |
| 7. |
Multiply line 6 by line 3
|
7.75 |
7.0 |
8.
|
Enter the credits and other taxes that are (1) taken into account in computing the understatement of tax and (2) allocated to you or
allocated jointly to you and your spouse. See instructions.
|
8.0 |
8.0 |
9.
|
Add lines 7 and 8.The total of columns (a) and (b) is the understatement of tax you are responsible for
|
9.75 |
9.0 |
| |
Note: Subtract this total from line 4 to get the understatement of tax that
qualifies for relief.
|
|
Filled-in Form 8857
This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief.
Janie and Joe Boulder filed a joint tax return for 2001. Joe did not report a $5,000 award he won that year. They received
a first letter of
proposed deficiency (30-day letter) for additional tax of $650 and penalties and interest of $165.
Janie applies the conditions listed under Innocent Spouse Relief on page 3 to see if she qualifies for relief.
-
Janie meets the first condition because the joint tax return they filed has an understatement of tax due to Joe's erroneous
item.
-
Janie believes she meets the second condition. She did not know about the award and had no reason to know about it because
of the secretive
way Joe conducted his financial affairs.
-
Janie believes she meets the third condition. She believes it would be unfair to be held liable for the tax because she did
not benefit from
the award. Joe spent it on personal items for his use only.
Because Janie believes she qualifies for innocent spouse relief, she files Form 8857 with the IRS. She fills in her name,
address, social
security number, and daytime phone number. She fills out the rest of the form as follows:
Line 1.
Janie enters “2001” because this is the tax year for which she is requesting relief.
Line 2.
She enters the name, address, social security number, and daytime phone number of her spouse.
Line 3.
She checks the Yes box because she received an IRS Notice of Deficiency for additional tax.
Lines 4–6.
Janie checks the No box on each of these lines because she and Joe were not divorced, separated, or living apart at all times during the
last 12 months.
Line 7.
Janie does not check the box on this line because she checked the No boxes on lines 4, 5, and 6.
Line 8.
Janie checks the Yes box on this line because the income items all belonged to her husband. She writes a statement (not illustrated)
explaining why she believes she qualifies for innocent spouse relief.
Line 9.
Janie checks the No box on this line because she does not have an underpayment of tax.
Signing and mailing Form 8857.
Janie signs and dates the form. She attaches the explanatory statement (not illustrated) required by the Form 8857
instructions. Finally, she mails
the form to the IRS employee named in the 30-day letter.
Visual Aids To See If You Qualify
The following visual aids provide a quick way for determining whether you may qualify for relief. But do not rely on these
visual aids alone. Also
read the earlier discussions.
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