The answer is likely yes, but let’s delve into this issue a little deeper as it is something that comes up a lot in my practice.
As a primer, we are assuming that your spouses’s business is a sole proprietorship with a Schedule C or a flow through entity like an 1120S return. This analysis wouldn’t apply to a C Corp or other entity that is not in your spouse’s name and social security number.
If you and your spouse file jointly, then you are each jointly and severally liable for the tax no matter if you knew anything about your spouse’s business or not. At least that is the IRS’s position. “Severally” means that the IRS can go after your spouse or you for the full amount.
This obviously puts unsuspecting spouses in quite a pickle and leaves them on the hook for their spouse’s mistakes on the tax return. So, is there any relief in sight when this does occur?
Yes. The IRS does have the innocent spouse, separation of liability and equitable relief programs that are available. They are extremely case specific and fact driven.
IRS Tax Topic 205 lays out the details for these.
Innocent Spouse Relief
You must meet all of the following conditions to qualify for innocent spouse relief:
- You filed a joint return that has an understatement of tax (deficiency) that’s solely attributable to your spouse’s erroneous item. An erroneous item includes income received by your spouse but omitted from the joint return. Deductions, credits, and property basis are also erroneous items if they’re incorrectly reported on the joint return
- You establish that at the time you signed the joint return you didn’t know, and had no reason to know, that there was an understatement of tax and
- Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
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Separation of Liability Relief
To qualify for separation of liability relief, you must have filed a joint return and must meet one of the following requirements at the time you request relief:
- You’re divorced or legally separated from the spouse with whom you filed the joint return
- You’re widowed, or
- You haven’t been a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you request relief.
If you had actual knowledge of the item that gave rise to the understatement of tax at the time you signed the joint return, you don’t qualify for separation of liability relief.
Equitable Relief
If you don’t qualify for innocent spouse relief or separation of liability relief, you may still qualify for equitable relief. To qualify for equitable relief, you must establish that under all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. In addition, you must meet the other requirements listed in Publication 971, Innocent Spouse Relief. See Revenue Procedure 2013-34 for information about how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted.
Although this relief is narrow, it does exist. You need a tax attorney to help you sort out whether or not your particular circumstances would merit such relief. Call 281 406 0209 today to discuss your tax problem!!