In a recent blog we wrote about the liability that attaches to filing a joint tax return. It is an important issue to consider. But there can be relief from joint liability if one qualifies as an ”innocent spouse”, a term defined by the Internal Revenue Code. Relief from tax liability requires that a taxpayer file Form 8857. Our partner in New Jersey, Eric Solotoff has written about this subject and for those who are concerned about liability for past filings, it is a subject worth review.
The process for seeking Innocent Spouse Relief, a provision for individuals concerned about the accuracy of tax returns filed by their current or former spouses, has become a potential minefield.
In June 2007, the IRS published a revised Form 8857 – Request for Innocent Spouse Relief. Prior to that time, the form was short and simple. This one-page form asked the name and address of each taxpayer, whether the relief seeker had been a victim of domestic abuse and feared that filing a claim would result in retaliation, if the IRS had determined an underpayment of tax, and whether the understatement was due to erroneous entries by the spouse. (see note 1) The new form, however, is four pages long and the questions are far more in-depth. Given the possibility for self-incrimination, the form must now be completed with great care.
Often, when preparing a party’s financial statement or budget for a divorce action the conversation turns to tax returns. When the parties involved lack substantial debt – consumer or otherwise – and yet still cannot explain how spending exceeded the level of income and asset draw downs, the accuracy of tax returns is brought into question. Often, and particularly in divorce cases, one spouse was not aware that the tax returns were inaccurate when filed. In such cases, that party may be entitled to Innocent Spouse Relief from the IRS.
So how does it happen? How can a spouse not know that the tax return was inaccurate when it was filed? Didn’t the spouse sign the return under penalty of perjury? Some common answers clients may give include: ‘It was April 15 (or August 15, October 15 if on extension) and my spouse shoved the tax returns in front of me and told me to sign them because we had to get them in the mail that day,’ ‘I trusted my spouse that the returns were right and just signed them,’ ‘My spouse told me they were correct, and I signed them,’ ‘I have no idea of the finances, my spouse handles everything,’ and so on. On occasion, ‘My spouse forged my name’ also has been used.
During divorce actions, it is not uncommon for parties to still file joint tax returns. Hopefully, this is done after the non- or lesser-earning spouse has had his or her attorney and accountant review the returns. Also, it is common that Indemnification Agreements are signed to protect one spouse from the inaccurate income reporting and/or improper deductions taken by the other spouse. However, the agreements are only binding between the parties, not with the IRS or state taxing authorities.
What should a spouse or former spouse do when the IRS comes calling and he or she really did not know that the tax return was inaccurate? It goes without saying that the individual should immediately contact his or her attorney and tax professional – especially now that the new form asks for more and deeper personal information.
The new form asks for more and deeper information than the original, much of which appears as if it could trigger the trap door precluding Innocent Spouse Relief. Worse yet, the responses to many of the questions could possibly be self-incriminating, which is why representation is essential.
Some of the new questions seek the following information:
-your highest level of education
-whether you were a victim of spousal abuse during the years that you are seeking relief (and further asks for a description and documentation such as police reports, restraining orders, doctor’s notes, etc.)
-whether you signed the returns, and if so, whether you were forced to sign under duress, threat of harm, etc., or if your signature was forged
-whether you had mental or physical problems both at the time the returns were signed and at the time you are filing the form (and documentation is requested)
-how involved you were in preparing the returns and whether you reviewed them before they were signed
-whether you were concerned that the returns were incorrect or incomplete when they were signed, and, if so, whether you just said nothing or made inquiry
-what you knew about your spouse’s income when the return was signed; and further, if your spouse was self-employed, whether you helped with the books
-when the returns were signed, whether you knew that tax was due, and if so, how you thought the tax was going to be paid
-whether you were having financial problems when the returns were signed
-your involvement in the household finances during the years you seek relief, including whether you had access to information and decision-making power regarding finances whether your spouse ever transferred any assets to you
-a listing of your monthly income and expenses
Since the form has to be signed under penalty of perjury, a wrong answer not only could preclude granting of Innocent Spouse Relief, but also could be used to assert – if not prove – tax fraud given a person’s knowledge and involvement when the returns were filed.
The bottom line is that great care should be taken when completing this form. A person seeking to do so should consult with an attorney and tax advisor, in advance, so as to not incriminate themself.