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Divorce and taxes, part 2: innocent spouse status

A wag might opine that there is no such thing as an innocent spouse. After all, there are few experiences in life that lay bare someone’s faults and shortcomings the way marriage can.

For tax purposes, however, “innocent spouse” is not a generalized statement about lack of culpability for marital ills. It is a term of art in tax law for a very specific form of tax relief, in circumstances where it would be inequitable to insist that someone pay a tax debt incurred by a spouse – even if a join return was signed.

As we will discuss in this part of our two-art post on divorce and taxes, innocent spouse relief is potentially available to an ex-spouse after divorce.

In some cases, a divorce decree may have assigned responsibility to one spouse only for amounts that may be owed on joint returns filed in previous years. But that assignment is not necessarily determinative if innocent spouse principles apply.

Keep in mind, however, that innocent spouse status is only one of three types of relief potentially available in cases where holding someone responsible for tax debt incurred by a spouse would be fundamentally unfair.

The other two forms are:
• Separation of liability
• Equitable

When an underreporting of income has led to an understatement of tax liability on a joint return, a separation of liability involves allocating the taxes and penalties to be paid between the spouses.

Equitable relief is a more general form of relief, based on the traditional legal concept of equity. Equity, in this sense, stands as a counterweight to the strict letter of the law.

Requests for innocent spouse relief used to be subject to a two-year time limit. But the IRS has changed this rule and the two-year limit no longer applies in many cases.

Source: IRS.gov, “Tax Information for Innocent Spouses,” Accessed Feb. 13, 2014