Innocent Spouse Tax Relief (Part 4)

Innocent Spouse Tax Relief, continued from last week

Actual Knowledge: Relief does not apply to any part of the understatement of tax due to your spouse's erroneous items of which you had actual knowledge. You and your spouse remain jointly and severally liable for this part of the understatement. If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. You had actual knowledge of an erroneous item if: you knew that an item of unreported income was received (this rule applies whether or not there was a receipt of cash), you knew of the facts that made an incorrect deduction or credit unallowable and/or for a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return.

Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself.

Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Likewise, neither is your actual knowledge of how the erroneous item was treated on the tax return relevant for purposes of demonstrating actual knowledge.   For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable.

Factors Supporting Actual Knowledge: The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. Factors the IRS may use include whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability and whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item.

Domestic Abuse Exception: Even if you had actual knowledge, you may still qualify for relief if you establish that you were the victim of domestic abuse before signing the return, and because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you.

If you establish that you signed your joint return under duress, then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. However, you may be required to file a separate return for that tax year.

Continued next week

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