Innocent Spouse Tax Relief (Part 2)

Innocent Spouse Tax Relief, continued from last week

Erroneous Items: Unreported income is any gross income item received by your spouse (or former spouse) that is not reported. Incorrect deduction, credit, or basis, is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Examples are: The expense for which the deduction is taken was never paid or incurred, the expense does not qualify as a deductible expense and no factual argument can be made to support the deductibility of the expense.

Actual Knowledge or Reason to Know: You knew or had reason to know of an understatement if you actually knew of the understatement, or a reasonable person in similar circumstances would have known of the understatement. The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement of tax due to an erroneous item.

The Facts and Circumstances Include: The nature of the erroneous item and the amount of the erroneous item relative to other items. The financial situation of you and your spouse (or former spouse). Your educational background and business experience. The extent of your participation in the activity that resulted in the erroneous item. Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns).

You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. You will be relieved of the understatement due to that portion of the item if all other requirements are met for that portion.

Indications of Unfairness for Innocent Spouse Relief: The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understatement. The following are examples of factors the IRS will consider: whether you received a significant benefit either directly or indirectly, from the understatement, whether your spouse (or former spouse) deserted you, whether you and your spouse have been divorced or separated and whether you received a benefit on the return from the understatement.

Significant Benefit:  Significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances. Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understatement.

Continued next week

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