Innocent Spouse Tax Relief (Part 7)
Innocent Spouse Tax Relief, continued from last week
Refunds: You are eligible to receive a refund of certain payments you made. If you are granted relief for an understatement of tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. Only installment payments made after the date you filed Form 8857 are eligible for a refund. Additionally, you must establish that you provided the funds for which you seek a refund. You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement.
If you are granted relief for an underpayment of tax, you are eligible for a refund of separate payments that you made after July 22, 1998, if you establish that you provided the funds used to make the payment for which you seek a refund. You are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made.
Limit on Amount of Refund: If you request relief within 3 years after filing your return, the refund cannot be more than the part of the tax paid within the 3 years (plus any extension of time for filing your return) before you filed your request for relief. If you request relief after the 3-year period, but within 2 years from the time you paid the tax, the refund cannot be more than the tax you paid within the 2 years immediately before you filed your request for relief.
Factors for Determining the Granting of Equitable Relief: The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax. The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Whether you are separated (legally or not) or divorced from your spouse. A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Whether you would suffer a significant economic hardship if relief is not granted. (In other words, you would not be able to pay your reasonable basic living expenses.) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. Whether you received a significant benefit (beyond normal support) from the unpaid tax or item causing the understatement of tax. Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. Whether you knew or had reason to know about the items causing the understatement or that the tax would not be paid, as explained next.
Knowledge or Reason to Know: In the case of an underpayment of tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. In the case of an income tax liability that arose from an understatement of tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understatement. Reason to know of the item giving rise to the understatement will not be weighed more heavily than other factors. Actual knowledge of the item giving rise to the understatement, however, is a strong factor weighing against relief. This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling.
Reason to know: In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.
If you have a specific question regarding this article, as a public service, and at no cost to you, I invite you to call me with your question. In addition, I am happy to give a second opinion on your previously prepared tax return done by a paid preparer at no charge.
This column is offered as a public service with the understanding that each person's tax situation is different; that you should consult your CPA before taking any action based upon comments made in this article. Thank you for your interest in reading my tax column.
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