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IRS allows more time to plead innocence

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in Small Business Tax,Small Business Tax Deduction Strategies

Usually, you’re guilty until proven innocent in the eyes of the IRS. But now the nation’s tax collection agency is making it easier for certain taxpayers, like those suffering in abusive situations, to qualify as an “innocent spouse.”

Alert: Previously, in Notice 20011-50, the IRS announced that it would not apply the standard two-year limit on collection activities for requests. It said it would allow taxpayers to take up to 10 years to request equitable relief.

Now the IRS is formally incorporating this change into proposed regulations and making it permanent. (REG 132251-1, 8/12/13)

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 tax responsibility continues to apply 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.

Traditionally, an individual could avoid liability for unpaid tax and penalties, despite having signed a joint return, only if the following requirements were 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 two-year limit for requesting innocent spouse relief is being waived. 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.

Tip: This change follows several other taxpayer-friendly changes in the “innocent spouse” rules the past few years.

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