Innocent Spouse Relief
To qualify for innocent spouse relief, a taxpayer:
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Must have filed a joint return with an “understatement of tax” (i.e., the difference between the amount of tax that should have shown on a return vs. the tax actually shown) that was due to “erroneous items” of his/her spouse.
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Must establish that at the time he/she signed the joint return, he/she didn’t know (and had no reason to know) that there was an understatement; and
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Accounting for all the facts and circumstances, it would be unfair (i.e., inequitable) to hold the taxpayer liable for the understatement of tax.
Erroneous Items are either:
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Unreported income that was received by the non-innocent spouse and isn’t reported on the return.
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Incorrect deductions, credits, or basis claimed by the non-innocent spouse which are improper or for which there is no basis in fact or law.
Examples of Erroneous Items
The following are examples of erroneous items:
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Deducted amount was never paid - Delta’s spouse claimed $10,000 for advertising expense on Schedule C, but never paid for advertising.
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Deducted expense does not qualify - Sheri claimed a business fee of $10,000 that actually was for the payment of a non-deductible state penalty.
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No factual argument to support deduction - Mac claimed $4,000 for security costs related to a home office. The costs were for veterinary fees and food costs for Buster, the family dog.
Indicators of Unfairness
Are determined based on the facts and circumstances of each individual case. To decide unfairness, the IRS checks factors like these:
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Whether the “innocent spouse” received significant direct or indirect benefit from the understatement of tax. A significant benefit is one which is excessive in terms of normal support.
Example - Significant Benefit: In March 2022, Jenna received $20,000 from Terence, her spouse of 10 years. The funds were traced to Terence’s lottery winnings in 2020. No winnings were reported on the couple’s joint 2020 federal return. The couple’s normal monthly household operating budget was around $4,000. More than likely, the IRS would rule that Jenna had received a significant benefit due to the $20,000 gift, even though it was received in a year other than the one in which the unreported income occurred.
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Desertion of the innocent spouse by the non-innocent spouse.
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Divorce or Separation of the spouses.
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Innocent spouse received a benefit on the return from the understatement.