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Innocent tax spouses gain time

By Kay Bell · Bankrate.com
Tuesday, September 20, 2011
Posted: 12 pm ET

I've been married almost 30 years. Yes, I was a child bride. That's my story and I'm sticking to it.

So, what does my wedded bliss have to do with taxes? Well, I've done our married filing jointly tax returns for each filing season since the hubby and I said "I do."

Statistically, we're the aberration when it comes to taxes. I tell him what's on the Form 1040 each year, and he says "Yeah, yeah, where do I sign?" In most marriages, it's still the husband who handles the finances and taxes and the good wife just signs the paperwork.

Regardless of which partner takes charge, such an approach can be a big problem when it comes to taxes. If you file a joint return, both of you are equally responsible for any tax liability. That means once you sign the tax paperwork -- even if you're ignorant of what's on it -- you are as responsible as the spouse who filled in each line.

The official term is joint and several liability. And it's why a lot of women who aren't involved in their marital finances and taxes end up in fiscal trouble and tax trouble.

There is an option if you, either as a wife or a husband, find your spouse has fudged your tax return. You can ask the Internal Revenue Service to cut you some slack.

The IRS offers three options for taxpayers burned by their spouse's (or ex-spouse's) creative tax-return filing.

Innocent spouse relief lets you off the hook for additional tax owed if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.

Separation of liability relief allocates any additional tax owed between you and your spouse or former spouse because an item was not reported properly on a joint return. The tax allocated to you is the amount for which you are responsible.

Equitable relief may apply when you do not qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to your spouse.

Spousal tax relief has been under fire recently from members of Congress as well as the National Taxpayer Advocate for being too restrictive. The problem was that under IRS rules, by the time a spouse discovered his or her spouse had cheated on their taxes, the deadline to file for innocent spouse relief had passed.

Back in the spring, 50 Representatives and three Senators wrote the IRS commissioner, noting that 50,000 innocent spouse claims are filed with the IRS each year and of those, approximately 2,000 are disallowed because of the relief filing limits.

That rule said that a taxpayer must request relief no later than two years after the date the IRS first attempted to collect the tax, regardless of which type of spousal tax relief being sought.

"When Congress created the innocent spouse protection in the Internal Revenue Code, we did not mandate a statute of limitation for equitable relief claims," the lawmakers wrote. "The two-year rule is counter to the spirit of the equitable innocent spouse provision as a safety valve for innocent spouses that takes into account all the facts and circumstances of each case."

The IRS heard the complaints and expanded the time period in which taxpayers may request relief. The amount of time to request equitable relief depends on whether you have a balance due or are seeking a credit or refund. That means in some cases, a tax-wronged spouse could have between three years and 10 years to seek relief.

If you find the IRS is coming after you for something your spouse erroneously entered on a joint return, check into the possibility of spousal tax relief.

But the best move is to not make the mistake in the first place. Pay attention to your jointly-owned money and know what's being claimed on your Form 1040 before you sign it.

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