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IRS extends ‘innocent spouse’ tax relief

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in Small Business Tax

The IRS is making it easier for tax return filers to qualify as an “innocent spouse.”

Alert: In a new ruling, the IRS eliminates a strict timing requirement under prior law. (IRS Notice 2011-70) And it says that other taxpayer-friendly changes are on the way.

The new ruling is effective immediately.

Here’s the whole story: Married taxpayers often benefit tax-wise by filing a joint tax return. But joint filing status comes with a catch: Each spouse is jointly and severally liable for any tax, interest and penalties attributable to the return.

This joint tax responsibility continues to apply even if the couple later gets a divorce. In other words, either ex-spouse could be forced to shoulder the tax burden. In fact, the IRS may try to collect the full amount due from one spouse, even if all or most of the income reported on the joint return was earned by the other spouse.

Under the innocent rules, an individual may avoid liability for unpaid tax and penalties, despite having signed a joint return, if the ­following requirements are met:

  • You filed a joint return which has an understatement of tax.
  • The understatement of tax is due to erroneous items of your spouse.
  • You establish that at the time the joint return was signed, you did not know (or have reason to know) there was an understatement of tax.
  • Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement.

The relief is requested within two years after the IRS started its collection activities.

Now the IRS says it will no longer apply the two-year limit to new requests for innocent spouse relief or requests it is currently considering. A taxpayer whose request was previously denied solely because of the two-year limit may reapply, using Form 8857, Request for Innocent Spouse Relief, as long as the statute of limitations hasn’t expired for the return in question.

Tip: The IRS will incorporate this change and other amendments into new regulations.

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