If you are married, you have the choice to file your spouses jointly or separately. Generally speaking, it is best for most married couples to file a joint return. However, each filing option has its pros and cons.
Prior to 2001, a significant number of married couples experienced a “marriage penalty” when filing their tax return. This marriage penalty occurs when the couple pays more in income taxes than they would have as single filers. However, changes made to federal laws have reduced the occurrence of marriage penalties. Some married couples may even receive a “marriage bonus” when they file jointly.
Married couples are allowed to file jointly, even if one of the spouses is not working. If one spouse has a significantly higher income than the other, a joint tax return could put the couple into a lower tax bracket. An example of this would be if one spouse is a psychiatrist, and earns $200,000 in 2016. The other spouse is a stay-at-home parent. If the psychiatrist were single, they would be in the 33% tax bracket. If they file jointly with the stay-at-home spouse, they are dropped down to the 28% bracket.
Additionally, there are some tax deductions and credits that are unavailable if couples file separate tax returns. Some examples of these include the:
- Earned Income Credit;
- American Opportunity Credit;
- Lifetime Learning Credit;
- Education Credits;
- Child and Dependent Care Credit; and
- The exclusion or credit for adoption expenses.
These tax credits and deductions are important to consider due to the fact that they may significantly reduce the amount of income tax you owe. It is for these reasons that many couples benefit from filing a joint return. Additionally, it could take less time to complete a joint return than a single file return. Tax payers could spend less on tax preparation fees when joint filing, as they will only need to submit one Form 1040.
What Is Innocent Spouse Relief?
If you choose to file a joint tax return with your spouse, you become jointly and severally liable for any tax deficiencies. You will also be jointly and severally liable for any tax interests and penalties. This remains true even if those deficiencies can be attributed to the income earned by just one spouse.
However, one spouse may request what is known as “innocent spouse relief.” They would request this exception to the tax code from the IRS. If the relief is granted, the spouse is relieved from paying the following:
- Taxes;
- Interest; and
- Penalties.
The purpose of such relief is for the “innocent” spouse to avoid being penalized if the “guilty” spouse or former spouse failed to report items on your tax return. It also relieves them from being punished if the other spouse incorrectly reported items on the joint tax return. If relief is granted, only the “guilty” spouse would need to pay the tax, interest, and associated penalties.
How Can I Qualify For Innocent Spouse Relief?
In order to qualify for innocent spouse relief as provided by the IRS, there are certain criteria that you must meet. It is important to note that you must meet all criteria in order to qualify, not just some.
You must have filed a joint tax return with your spouse, and that return must have an understatement of tax due to an invalid or erroneous item on the part of your spouse. The IRS defines erroneous items as unreported income, or incorrect deduction, credit, or basis. Tax payers are responsible for reporting all income, which covers gifts, earnings, property, etc.
Any gross income that your spouse received, but was not reported, would be considered unreported income. Any incorrect deduction, credit, or property basis claimed by your spouse would also be considered an erroneous item.
Additionally, you must prove that at the time of signing the joint return, you did not know that your spouse had understated your taxes. You must also prove that you had no reason to be aware of any understatement. You will need to demonstrate that, considering all of the facts and circumstances, it would actually be unfair for the IRS to hold you liable for the understatement.
Finally, you must prove that you and your spouse have not transferred property to each other, which would constitute participating in a fraudulent scheme or tax evasion. Tax evasion refers to intentional conduct in which a taxpayer purposefully underpays their taxes, or participates in fraud while participating in taxes. A fraudulent scheme could include any scheme to defraud the IRS, or another third party. Such a third party may include a creditor, ex-spouse, or business.
How Can I Demonstrate That I Did Not Have Knowledge Of a Tax Understatement?
The IRS would assume that you knew or had reason to know of an understatement of tax, if a reasonable person in similar circumstances would have been aware of an understatement. An example of this would be if your spouse tells you that they are underreporting your income prior to filing the joint tax return. In such an example, you would have actual knowledge of the tax understatement.
You cannot receive innocent spouse relief if you filed separate tax returns. Innocent spouse relief is only awarded to married couples who jointly file their tax returns. This is because doing so shows that one spouse was “innocent” to the tax understatement, and as such should not be penalized for being unaware.
If you and your spouse file your tax returns separately, and understate your due tax, you alone will be held responsible and liable for any tax deficiencies. As previously mentioned, you will also be held liable for any associated interests and penalties.
When Should My Spouse and I File Separate Tax Returns?
As previously discussed, it is in the interest of most married couples to file a joint tax return. However, there are certain circumstances in which it would be better to file separately. One such circumstance would be if one of the spouses has a significant amount of medical bills. This is because the IRS sets financial thresholds before you are able to deduct medical expenses from your taxes. These expenses can be deducted when they exceed 10% of your adjusted gross income. As such, if you and your spouse are both high income earners, it could be difficult to reach the threshold together.
Another circumstance would be if one spouse has concerns regarding the other spouse’s tax return. Both spouses are required to sign a joint tax return; your signature makes it so both you and your spouse are equally liable for tax payments and penalties. If you have concerns regarding the legality of your spouse’s filing, you should consider filing separate tax returns. In doing so, you would not sign your spouse’s return, and therefore would not be liable for any payments or penalties levied on your spouse.
Do I Need an Attorney for Innocent Spouse Relief from Joint Tax Liability?
If you think you may need to request innocent spouse relief from joint tax liability, you should consult with an experienced and local tax attorney. Tax laws can vary from state to state, especially laws concerning joint filings. As such, a local tax attorney will be best suited to helping you understand your state’s specific tax laws, and how those laws may affect your legal options.
A tax attorney can also walk you through the process of requesting innocent spouse relief. Finally, an experienced tax attorney can also represent your legal interests in court, as needed.
