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Guilty Until Proven Innocent

Toni Schwahn, WHTCPAby Toni Schwahn, CPA, CFET
schwahn@whtcpa.com

All too often when settling a divorce, couples agree who should be liable for any outstanding tax liabilities and make it part of the divorce decree. However, did you know that regardless of what the divorce decree states, both parties are liable for a joint tax liability? On a joint return, one spouse can be held liable for the tax due even if the other spouse earns the income.

There is a special relief provision for an innocent party to have the outstanding tax liability become the sole responsibility of their spouse. The provision is called Innocent Spouse Relief and there are three types of potential relief under this provision:

  1. Innocent spouse relief
  2. Separation of liability
  3. Equitable relief

The timing of the filing for this relief is very stringent and you must file for relief no later than two years after the date on which the IRS first attempted to collect the tax. Examples of collection activities that can trigger the two-year period are:

  1. Offset of your current income tax refund against a prior tax liability and the IRS informs you about your right to file Form 8857
  2. Filing of a claim by the IRS in a court proceeding in which you were a party, including filing a proof of claim in a bankruptcy proceeding
  3. Filing of a suit by the US against you to collect the joint liability
  4. Issuance of a Section 6330 notice (intent to levy and right to a due process hearing)

If you feel your client may benefit from this provision, please review Form 8857 and IRS Publication 971 for more details.

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