In recent posts, we’ve looked briefly at the difference between tax negligence and tax fraud, noting the differences in terms of intent, evidence and penalties. One issue that can sometimes arise with tax returns is, what if an individual filing a tax return has little or no knowledge about what was reported?
This can happen, for instance, when one spouse—or former spouse, in cases of divorce—takes responsibility for a joint tax return, whether by filing the return on his or her own or by hiring an accountant or attorney as a paid tax preparer. What responsibility does the other spouse have when he or she essentially didn’t handle any of the tax filing but the IRS later finds discrepancies and seeks penalties for negligence or fraud?
Ordinarily and in general, a spouse cannot disclaim responsibility for errors in tax returns, since in signing joint tax return forms, each spouse testifies that the information provided is true and correct. This makes each spouse responsible for the entire liability on the tax return. There are certain exceptions to the general rule, though.
Exception is made, for instance, in cases where a spouse was essentially innocent with respect to the tax return. The IRS may grant “innocent spouse relief” in cases where penalties are assessed for an understatement of tax of which the spouse did not know and had no reason to know, and if it would be unfair to hold the spouse liable for the understatement. An innocent spouse will be denied relief if there is evidence that the spouse cooperated with the other spouse in the transfer of property as part of a fraud scheme directed at the IRS or any other third party.
In our next post, we’ll look a bit more at innocent spouse relief and other forms of relief that may be available to spouses when erroneous tax returns are filed, as well as how an experienced attorney can help in securing such relief.