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Are You An “Innocent” Spouse?

When you file a joint tax return with your spouse, each of you can be held personally liable for any understatement of tax—regardless of who earned the income or filled out the return. This can often become a point of contention if the couple gets a divorce or separates. However, in limited circumstances, the IRS may relieve the liability of an “innocent spouse.”

To qualify for this special tax relief, the following requirements must be met:

*The couple must have filed a joint return.

*The understatement of tax must be due to erroneous items of the other spouse.

*The innocent spouse must establish that he or she did not know or have reason to know that there was an understatement of tax.

*The innocent spouse must request relief within two years after being notified of the collection activity.

*Taking into account all of the facts and circumstances, it would be unfair to hold the innocent spouse liable for the understatement of tax.

The courts are taking a harder stance on this issue as shown by a new case: A husband operated a trucking company while his wife handled the books. She did not report all their taxable income on their joint return. However, the Tax Court determined that the husband should have been aware of some discrepancies. Furthermore, part of the tax liability was attributable to his own income-producing activities. As a result, the Tax Court did not grant innocent spouse relief to the husband.

Lesson to be learned: Make sure you understand the tax returns you sign. If you have any questions, don't hesitate to ask.

 

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