Innocent Spouse Relief: Escaping Joint Liability

Why This Matters for the Exam

Innocent Spouse Relief is tested frequently because it involves analyzing fact patterns to determine eligibility. The exam tests your knowledge of the three types of relief, the deadlines, and the knowledge requirement.

Expect at least 2-4 questions distinguishing between Innocent Spouse (liability) and Injured Spouse (refund offset), and testing when each type of relief applies.

The Problem: Joint and Several Liability

When married taxpayers file a joint return, they both become jointly and severally liable for the entire tax debt. This means:

• The IRS can collect 100% of the debt from either spouse.
• Even if one spouse earned all the income and caused the understatement, the other spouse is equally liable.
• Divorce does not sever this liability (despite what divorce decrees may say).

Innocent Spouse Relief provides a way for one spouse to be relieved of liability when it would be unfair to hold them responsible for the other spouse's tax problems.

The Three Types of Innocent Spouse Relief

Type 1: Traditional Innocent Spouse Relief (§6015(b))

Requirements:

1. Filed a joint return with an understatement of tax (not underpayment).
2. The understatement was due to erroneous items of the other spouse.
3. You did not know (and had no reason to know) of the understatement when signing.
4. It would be inequitable to hold you liable considering all facts and circumstances.

"Understatement" vs. "Underpayment":

• Understatement: The return was wrong (unreported income, overstated deductions).
• Underpayment: The return was correct, but the tax wasn't paid.

Traditional relief only applies to understatements. If the return was accurate but the tax just wasn't paid, you need equitable relief.

Type 2: Separation of Liability (§6015(c))

Requirements:

1. Filed a joint return.
2. Now divorced, legally separated, or lived apart for 12+ months.
3. Did not have actual knowledge of the item causing the understatement.

How It Works: The IRS allocates the deficiency between the spouses based on who is responsible for each item. Each spouse is only liable for their allocated portion.

Example: A couple's joint return underreported the husband's business income by $50,000. After divorce, the wife requests separation of liability. The IRS allocates 100% of the understatement to the husband. The wife is relieved of liability for that portion.

Limitation: If you had actual knowledge of the erroneous item (even if you didn't know it was wrong), you can't use this relief.

Type 3: Equitable Relief (§6015(f))

Requirements:

1. Traditional relief and separation of liability don't apply.
2. It would be inequitable to hold you liable.
3. Applies to both understatements and underpayments.

When It's Used:

• The return was correct, but the tax wasn't paid (underpayment).
• You knew about the item but didn't know it was improper.
• You don't meet the separation requirements.

Factors the IRS Considers:

• Marital status at time of request.
• Economic hardship if relief is denied.
• Whether you received significant benefit from the unpaid tax.
• Whether you've been abused by the other spouse.
• Whether you've made a good-faith effort to comply with tax laws.

Key Advantage: There is no statutory deadline for requesting equitable relief.

Form 8857: Request for Innocent Spouse Relief

All three types of relief are requested on Form 8857.

What the Form Asks:

• Marital status history.
• Current living situation.
• Knowledge of the erroneous items.
• Financial situation and hardship factors.
• Any history of domestic abuse.

IRS Notification: The IRS is required to notify the non-requesting spouse (the "other spouse") that a claim has been filed. The other spouse has the right to participate in the determination.

Comparison: Innocent vs. Injured Spouse

Exam Memory Device: Innocent = "I shouldn't OWE this." Injured = "I want my refund BACK."

Real-World Scenario

Scenario: Maria filed jointly with her husband Carlos for 2022. Carlos had a side business he never told Maria about, and he underreported $100,000 of income. The IRS assessed a $30,000 deficiency. Maria and Carlos divorced in 2024. Maria just received a collection notice.

• Can Maria claim Traditional Relief (§6015(b))? Possibly—if she had no knowledge of the side business, it would be inequitable to hold her liable. She must file Form 8857 within 2 years of the collection notice.
• Can Maria claim Separation of Liability (§6015(c))? Yes—she's divorced and claims no knowledge of the unreported income.
• Can Maria claim Equitable Relief (§6015(f))? Also possible if the other types fail.

On the Exam

Expect 2-4 questions on Innocent Spouse Relief, typically:

1. Type Questions: "Which type of relief applies to underpayments, not just understatements?"
2. Deadline Questions: "What is the deadline for requesting Traditional Innocent Spouse Relief?"
3. Form Questions: "Which form is used to request Innocent Spouse Relief?"
4. Distinction Questions: "What is the difference between Innocent Spouse and Injured Spouse?"

The key is to remember: Form 8857, three types, 2-year deadline (except equitable), knowledge test.