In previous posts, we’ve looked briefly at innocent spouse relief, which is available to spouses who did not know and could not have known about understatements in tax reporting reported by their spouse, and it would be unfair to hold them responsible for the understatement. Another form of tax relief that may be available, for spouses who don’t qualify for innocent spouse relief, is separation of liability.
Separation of liability is available to those who have filed a joint return and who are either (a) no longer married to, or are separated from, the joint spouse, or (b) not a member of the same household as the spouse who filed the joint return in the year preceding the date on which the spouse filed a request for innocent spouse relief.
Spouses who lived in the same home, who lived separately but were not estranged, or who were temporarily absent from the household with the expectation of returning are considered members of the same household. Temporary absent can be based on things like illness, vacation, military service, educational pursuits, or imprisonment.
Separation of liability is not available for any portions of an erroneous tax item of which the spouse seeking relief had actual knowledge. This is a specific requirement, and relief may still be available to spouses who only had reason to know of the erroneous item, who only had knowledge of the source of an erroneous item. Neither is separation of liability available for portions of an erroneous tax item that was transferred between spouses or to another in order to avoid tax or as part of another fraud scheme.
While it is up to the spouse seeking relief to prove that the requirements for separation of liability are met, including that property was not transferred to avoid tax, it is up to the IRS to prove actual knowledge. Taxpayers also have the burden of proving the basis for allocating the erroneous item—for demonstrating their share of responsibility. Working with an experienced attorney in these cases is important, of course, to ensure one builds the strongest case possible and that the IRS is held to its burden of proof.
In a future post, we’ll look at a final avenue of relief for spouses.