| Pub. 971, Innocent Spouse Relief |
2005 Tax Year |
Publication 971 - Main Contents
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.
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 for a previous
year.
If you are requesting relief from liability arising from community property laws, a different filing deadline applies. For
details, see
Community Property Laws , later.
IRS spousal notification.
The IRS informs your spouse (or former spouse) if you request relief and allows your spouse (or former spouse) to
participate in the determination
of the amount of relief from liability. This applies to requests for relief from joint and several liability on a joint return
and from liability
arising from community property laws. If you are requesting relief from joint and several liability on a joint return, 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 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, after July 22, 1998, a final decision on your tax liability in a prior proceeding
and relief
from joint and several liability was an issue in that proceeding, or you meaningfully participated in that proceeding and
could have requested relief
from joint and several liability.
-
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 seek relief.
Exception for agreements relating to TEFRA partnership proceedings.
You may be entitled to relief in (3) 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. ( TEFRA is an acronym that refers to the “ Tax Equity and Fiscal Responsibility Act of
1982” that prescribed the tax treatment of partnership items.) You are not entitled to 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 2001 joint income tax return on April 15, 2002. Herb died in March 2003, and the executor
of Herb's will
transferred all of the estate's assets to Wanda. In February 2004, the IRS assessed a deficiency for the 2001 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 for relief 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 website at www.ustaxcourt.gov.
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.
Relief for Married Persons Who Did Not File Joint Returns
Married persons who live in community property states, but who did not file joint returns, 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.
-
The item of community income you did not include is one of the following:
-
Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.
-
Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.
-
Your spouse's (or former spouse's) distributive share of partnership income.
-
Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Use the
appropriate
community property law to determine what is separate property.
-
Any other income that belongs to your spouse (or former spouse) under community property law.
-
You establish that you did not know of, and had no reason to know of, that community income. See Actual knowledge or reason to
know, next.
-
Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. See
Indications
of unfairness for liability arising from community property law, later.
Actual knowledge or reason to know.
You knew or had reason to know of an item of community income if:
-
You actually knew of the item of community income, or
-
A reasonable person in similar circumstances would have known of the item of community income.
Amount of community income unknown.
If you are aware of the source of the item of community income or the income-producing activity, but are unaware of
the specific amount, you are
considered to know or have reason to know of the item of community income. Not knowing the specific amount is not a basis
for relief.
Reason to know.
The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community
income. The facts and
circumstances include:
-
The nature of the item of community income and the amount of the item relative to other income items.
-
The financial situation of you and your spouse (or former spouse).
-
Your educational background and business experience.
-
Whether the item of community income 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).
Indications of unfairness for liability arising from community property law.
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 of tax due to the item of community income.
The following are examples of factors the IRS will consider.
-
Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below).
-
Whether your spouse (or former spouse) deserted you.
-
Whether you and your spouse have been divorced or separated.
For other factors see Factors for Determining Whether To Grant Equitable Relief on page 8.
Benefit from omitted item of community income.
A benefit includes normal support, but does not include de minimis (small) amounts. Evidence of a direct or indirect
benefit may consist of
transfers of property or rights to property, including transfers received several years after the filing of the return.
For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the
property is traceable to
omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from
those omitted items of
community income.
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).
How and When To Request Relief
You request relief by filing Form 8857, as discussed earlier. Fill in Form 8857 according to the instructions.
For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration
of the period
of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief.
However, if
the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days
after the examination
begins.
By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your
spouse (or former
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 (or former 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 (or former 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 (or
former 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 (or former 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.
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 are either of the following.
-
Unreported income. This is any gross income item received by your spouse (or former spouse) that is not reported.
-
Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your spouse (or
former 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 of your joint 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 (or former spouse), the relief discussed
here does not apply to any part
of the understatement of tax due to that item. You and your spouse (or former 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 (or former spouse), the relief discussed
here does not apply to any
part of the understatement of tax due to that item. You and your spouse (or former 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 (or former 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 (or former 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 Factors for Determining Whether To Grant 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.
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 (or former 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 (or former 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.
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 because they are jointly and individually liable for it.
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 (or former 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
(or former 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.
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 any
of these types of relief,
and the IRS determines you do not qualify for any of them, the IRS will consider whether equitable relief is appropriate.
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. 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.
Conditions for Getting Equitable Relief
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 (or former 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 (or former spouse) did not transfer property 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 or fail to file your return with the intent to commit fraud.
-
You did not pay the tax. However, see Refunds, later, for situations in which you are entitled to a refund of payments you
made.
-
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 Factors for Determining Whether To Grant Equitable Relief, later.
-
The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with
whom you filed the
joint return, unless one of the following exceptions applies:
-
The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet
this exception,
that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.
-
If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption
based on the
facts and circumstances.
-
You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse
(or former
spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment
may be
attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse
(or former
spouse).
-
You establish that you were the victim of abuse before signing the return, and that, as a result of the prior abuse, you did
not challenge
the treatment of any items on the return for fear of your spouse's retaliation. If you meet this exception, relief will be
considered although the
deficiency or underpayment may be attributable in part or in full to your item.
In the following situations, you are eligible to receive a refund of certain payments you made.
Understatement of tax.
If you are granted relief for an understatement of tax, you are eligible for a refund of certain payments made under
an installment agreement that
you entered into with the IRS, if you have not defaulted on the installment agreement. Only installment payments made after
the date you filed Form
8857 are eligible for a refund. Additionally, you must establish that you provided the funds for which you seek a refund.
You are not in default if
the IRS did not issue you a notice of default or take any action to end the installment agreement.
The amount of the refund is subject to the limit discussed later under Limit on amount of refund.
Underpayment of tax.
If you are granted relief for an underpayment of tax, you are eligible for a refund of separate payments that you
made after July 22, 1998, if you
establish that you provided the funds used to make the payment for which you seek a refund. You are not eligible for refunds
of payments made with the
joint return, joint payments, or payments that your spouse (or former spouse) made.
The amount of the refund is subject to the limit discussed next.
Limit on amount of refund.
If you request relief within 3 years after filing your return, the refund cannot be more than the part of the tax
paid within the 3 years (plus any
extension of time for filing your return) before you filed your request for relief.
If you request relief after the 3-year period, but within 2 years from the time you paid the tax, the refund cannot
be more than the tax you paid
within the 2 years immediately before you filed your request for relief.
Factors for Determining Whether To Grant 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 factors that the IRS will consider to determine whether to grant equitable
relief. The IRS will
consider all factors and weigh them appropriately.
The following are examples of factors that may be relevant to whether the IRS will grant equitable relief.
-
Whether you are separated (whether legally or not) or divorced from your spouse. A temporary absence, such as an absence due
to
imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose.
A temporary absence is one
where 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.
-
Whether you would suffer a significant economic hardship if relief is not granted. (In other words, you would not be able
to pay your
reasonable basic living expenses.)
-
Whether you have a legal obligation under a divorce decree or agreement to pay the tax. This factor will not weigh in favor
of relief if you
knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the
income tax
liability.
-
Whether you received a significant benefit (beyond normal support) from the unpaid tax or item causing the understatement
of tax. (For a
definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief on page 5.)
-
Whether you have 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.
-
Whether you knew or had reason to know about the items causing the understatement or that the tax would not be paid,
as explained next.
Knowledge or reason to know.
In the case of an underpayment of tax, the IRS will consider whether you did not know and had no reason to know that
your spouse (or former spouse)
would not pay the income tax liability.
In the case of an income tax liability that arose from an understatement of tax, the IRS will consider whether you
did not know and had no reason
to know of the item causing the understatement. Reason to know of the item giving rise to the understatement will not be weighed
more heavily than
other factors. Actual knowledge of the item giving rise to the understatement, however, is a strong factor weighing against
relief. This strong factor
may be overcome if the factors in favor of equitable relief are particularly compelling.
Reason to know.
In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness
of your spouse (or former
spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and
household financial matters,
your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.
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. 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.
Factors Weighing in Favor of Equitable Relief
The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief.
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.
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 or qualified
dividends. 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.)
| |
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(a)
Your Items
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|
(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. |
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|
|
3.
|
Divide line 1 by line 2. Enter the result as a decimal (rounded to at least 3 places)
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3. |
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3. |
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4.
|
Enter the understatement of tax*
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4. |
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|
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5.
|
Enter the credits and other taxes taken into account in computing the understatement of tax. See instructions
|
5. |
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| 6. |
Subtract line 5 from line 4
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6. |
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| 7. |
Multiply line 6 by line 3
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7. |
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7. |
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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. |
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8. |
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9.
|
Add lines 7 and 8. The total of columns (a) and (b) is the understatement of tax you are responsible for
|
9. |
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9. |
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| |
Note: Subtract this total from line 4 to get the understatement of tax that qualifies for
relief.
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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 the benefits
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.
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.
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 4), 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).
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.
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 |
|
| |
|
|
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|
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).
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 4), 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).
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
below) 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.) Keep for your Records
| |
|
(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.
|
|
|
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 4 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.
The following flowcharts provide a quick way for determining whether you may qualify for relief. But do not rely on these
flowcharts alone. Also
read the earlier discussions.
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