When a married couple files a joint tax return, they are “jointly and severally” liable for the tax payments. What this means, practically speaking, is that the IRS can come after either spouse or both of them for a tax omission or underpayment, even if only one spouse was the real culprit. This includes back taxes, penalties and interest.
In fact, one spouse may be held liable even if he or she was completely unaware of the situation. And getting a divorce afterward doesn’t get you off the hook.
However, tax relief may be granted to an “innocent spouse” if certain requirements are met. To qualify:
You must have filed a joint return that has an understatement of tax that's solely attributable to your spouse's erroneous item.
You establish that you didn't know — or have reason to know — that there was an understatement of tax when the return was filed; and
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
As you might imagine, this issue is frequently contested in the courts. The Tax Court often takes a hard stance, but in a new case it was in a forgiving mood (Bishop, TC Summ Op. 2018-1, 1/4/18).
Facts and the case: Husband and Wife married in 2007, were temporarily separated twice in 2014, finally separated for good in 2015 and got divorced in 2016. During part of this time, they maintained a joint checking account that they used for payroll check deposits and other transactions. Both Husband and Wife had debit cards for the account.
In 2014, Wife received a distribution of more than $15,000 from an Edward Jones retirement account that she inherited from her father in 2009. Edward Jones withheld tax of about $2,700 from the distribution and reported both amounts to IRS. Subsequently, $6,000 was deposited into the joint account that the couple maintained.
As they had done in prior years, the couple jointly provided information to their tax return preparer, but they failed to report the Edward Jones distribution. When the couple’s 2014 return was audited, the IRS determined that Husband owed more than $3,500 in tax due to the Edward Jones distribution.
Husband admitted to the Tax Court that he knew about the retirement account and was aware of withdrawals made in other years for various purposes. Yet he denied any knowledge of the 2014 distribution. He also conceded that he was at fault for not checking the joint bank account records. But he maintained that Wife had duped him by remaining silent and that he had no actual knowledge of the distribution.
For her part, Wife claimed that Husband’s testimony wasn’t credible. She argued that he had actual knowledge of the 2014 distribution because it was deposited in their joint bank account before their tax return was prepared. Husband continued to write checks from the account and to access funds by debit card.
In the end, the Tax Court concluded that Husband “should have known” about the distribution but cited his lack of actual knowledge. Accordingly, the Court granted Husband innocent spouse relief.
Most taxpayers won’t be as fortunate as this joint filer. If a client is seeking innocent spouse relief, make sure he or she is standing on firm ground.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...