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More time for innocent spouse tax relief

By Kay Bell · Bankrate.com
Thursday, August 15, 2013
Posted: 6 pm ET

When a married couple shares tax filing via a joint return, they are equally liable for the taxes due and any added charges that might arise from mistakes on the return.

In some cases, however, one spouse doesn't really pay close attention to the filing. That's an issue that deserves attention on its own merits (or demerits).

But if we skip the "how we got into this mess" phase and go directly to "what to do after it happens," there is some help for spouses who find themselves with major tax bills because of actions carried out solely by their husband or wife.

And now the Internal Revenue Service is giving these duped husbands and wives, dubbed innocent spouses, even more time to make their cases as to why they shouldn't share in the tax troubles of their spouse.

Since 2011, the IRS has been ignoring the two-year limit for joint filers to request equitable relief under the innocent spouse rules. Under equitable relief, the IRS essentially agrees that, based on the requesting taxpayer's facts and circumstances, it would be unfair to hold that husband or wife liable for any understated or unpaid tax.

Now the agency has issued a notice to officially and permanently make the time frame in which such relief must be requested to 10 years.

This new time limit will not only help spouses applying for future equitable relief, but also those who were denied because they missed the deadline to file.

The IRS says that if a person's relief request made on July 25, 2011 or later was denied solely because it was made after the two-year filing limit, he or she may reapply. (July 25 is the date of the agency's previous innocent spouse notice.)

Basically, the innocent spouse relief procedures, initiated by filing Form 8857, Request for Innocent Spouse Relief, were designed to help the husband or wife who did not know and did not have reason to know that his or her other half understated or underpaid an income tax liability.

A variety of factors, such as who controls the couple's finances and potential spousal abuse, are taken into consideration by the IRS in determining whether a spouse is innocent when it comes to incorrect tax filings.

3 types of spousal tax relief

There also are three types of innocent spouse relief.

When a husband or wife is granted general innocent spouse relief, he or she does not owe any additional tax arising from a spouse's (or former spouse's) failure to report income, improper reporting of income or improper claims of deductions or credits.

A spouse also can be granted separation of liability relief. In this case, the taxes owed are allocated between the spouse who improperly filed and the unknowing husband or wife. The taxpayer who receives this relief still owes a tax bill, but not for any wrongly filed information by his or her spouse.

Finally, a spouse can be granted equitable relief. This applies when a husband or wife doesn't qualify for full innocent spouse relief or separation of liability relief in connection with information not reported properly on a joint return and generally attributable to the spouse. Equitable relief also applies when the tax amount is correct, but remains unpaid because of the spouse's actions.

The new 10-year filing period applies only to equitable spousal relief. The two-year limit remains in place for requests of the other two types of innocent spouse relief.

The IRS is accepting comments on its proposed regulation, so some further tweaks to innocent spouse requests might be forthcoming. But the 10-year filing period for equitable spousal relief is expected to stay.

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You also can follow me on Twitter @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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