Filing a joint tax return with a spouse can offer several tax benefits, such as lower tax rates and eligibility for certain deductions and credits. However, it also comes with a significant downside: joint and several liability. This means both spouses are legally responsible for the entire tax liability, regardless of who earned the income or made errors on the return.
This isn’t a problem for many taxpayers—until they discover that their spouse or ex-spouse (“spouse”) failed to report income or took improper deductions or tax credits, resulting in understated tax. In such cases, one spouse may be unfairly burdened with a tax debt they had no part in creating.
Fortunately, the tax law provides relief options under its Innocent Spouse Relief provisions, including (1) innocent spouse relief, (2) separation of liability relief, and (3) equitable relief. This blog will focus on equitable relief.
What Is Innocent Spouse Equitable Relief?
Taxpayers who do not qualify for either innocent spouse relief or separation of liability may have the option to apply for equitable relief. To qualify, you must have an understated tax or unpaid tax and must demonstrate that considering all the facts and circumstances holding you responsible for the understated or unpaid tax would be unfair.
Equitable relief is the only type of relief available for correctly reported but unpaid taxes.
When Is Equitable Relief Available?
The IRS may grant Equitable Relief if:
- You filed a joint return for the year you want tax relief.
- You cannot obtain relief under another innocent spouse rule.
- The time to submit your request for relief has not expired.
- There was no impermissible or fraudulent transfer of assets between you and your spouse.
- You did not knowingly file a fraudulent return with your spouse.
- You are seeking relief from a tax debt that was caused in whole or in part by an item of your spouse or an underpayment of tax created by the income of your spouse.
Factors the IRS Considers for Equitable Relief
Because Equitable Relief is based on fairness, the IRS considers several positive and negative factors when reviewing applications.
Factors That Support Granting Relief:
- Marital Status: If you are divorced, legally separated, or no longer living with your spouse.
- Economic Hardship: If paying the tax debt would cause you significant financial difficulty.
- Lack of Knowledge: If you were unaware (and had no reason to know) about the tax issue when you signed the return.
- Spousal Abuse or Duress: If you were forced or pressured to sign the return under threat or coercion.
- Legal Obligation: Under a divorce decree or other legally binding agreement, your spouse is obligated to pay the tax
- Significant Benefit to the Other Spouse: If your spouse unfairly benefited from the tax issue while you did not.
- Compliance with Tax Laws: If you are currently meeting your tax obligations.
- Mental or Physical Health: You were in poor health at the time the return was filed or when you requested relief.
Factors That Weigh Against Relief:
- You Knew or Should Have Known About the Tax Issue: If you had reason to know about the underpayment or understatement.
- You Benefited from the Tax Issue: If you directly benefited from the incorrect tax reporting.
- Compliance with Tax Laws: You are not current with your tax obligations following the years you request relief.
You may present additional factors that you would like the IRS to consider in granting you relief. The findings of the IRS used to grant or deny equitable relief are not based on any one factor or even a majority of factors. The importance of each factor varies based on your circumstances. Abuse or financial control by your spouse is a factor that can impact the other factors.
How to Apply for Equitable Relief
If you believe you qualify for Equitable Relief, you should file IRS Form 8857, Request for Innocent Spouse Relief. The form includes detailed questions about your circumstances and the factors that may qualify you for equitable relief. The IRS suggests providing as much detail and supporting documentation as possible.
Time Limits for Filing
You typically need to submit your request within the time the IRS has to collect taxes. Generally, the IRS has 10 years from the date the tax liability is assessed to collect the tax. In specific situations, this 10-year period may be suspended.
However, if you’re requesting a refund, you generally have three years from the date you filed the return or two years from the date you paid the tax, whichever is later.
What Happens After You Apply?
Once you submit your request, the IRS will:
- Review your application and supporting evidence.
- Notify your spouse or ex-spouse (as required by law) and allow them to provide input.
- Make a preliminary determination based on the facts and circumstances.
If relief is granted your liability for the tax will be removed or reduced. If relief is denied, you remain liable for the tax. However, you can appeal the decision. If you are still denied relief after the issuance of the final determination letter, you can petition the U. S. Tax Court to review the denial.
Final Thoughts: Is Equitable Relief Right for You?
Equitable Relief can be a lifeline for taxpayers unfairly burdened with a spouse’s tax debt, especially in financial deception or abuse cases. Applying for relief can be complicated, and qualifying for relief is not guaranteed. Each case is evaluated based on its unique circumstances.
If you’re considering applying for innocent spouse relief, it may be wise to consult an experienced tax resolution company such as East Coast Tax Consulting. We can help you build a strong case and guide you through the process. Call us today at 561-826-9303.