Dear Clients and Friends:

When a couple files a joint return, each spouse is jointly and severally liable for the full amount of tax on the couple's combined income, including any tax deficiency that IRS assesses after an audit. This means that IRS can come after either spouse to collect the entire tax, not just the portion attributable to that spouse's income. The same is true for any interest and penalties, except the civil fraud penalty, which can only be imposed on a spouse who has actually committed fraud.

There are three provisions in the law that alleviate the harshness of the joint and several liability rules. One provision grants relief to "innocent spouses" who were unaware of a tax understatement attributable to the other spouse. A second provision allows joint return filers, who are widowed, divorced, legally separated, or have lived apart for at least one year, to limit their liability for deficiencies on the joint return. And a third provision allows joint return filers to avoid liability for unpaid amounts of tax shown on joint returns as filed, but not paid.

Relief for innocent spouses. An innocent spouse can elect to seek relief from liability for a tax understatement attributable to the other spouse's erroneous tax items, such as unreported income or disallowed deductions. To qualify, you must show that you didn't know about the understatement and that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. Partial relief also may be granted. Relief is available under this provision even if you are still married and living with your spouse.

Election to limit liability. In some cases, a spouse can elect to limit liability for any deficiency on the joint return to that spouse's allocable portion of the deficiency. The election can be made only if the spouses are no longer married (divorced or widowed), are legally separated, or lived apart for the 12 months before the election was made.

If you make the election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you had filed separate returns. For example, you will generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won't provide relief from your spouse's tax items to the extent that IRS proves that you actually knew about them when you signed the return, unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you for the purpose of avoiding paying the tax.

Relief from liability for unpaid tax. The first two types of relief apply to situations in which the amount of tax has been understated on a joint return. The last type of relief is available when there is no understatement, but the tax as shown on the return has not been paid through no fault of the spouse applying for the relief. To qualify for this relief, you must show that when the return was filed, you didn't know and had no reason to know that the tax wouldn't be paid, and that it was reasonable for you to have believed that the tax was paid by your spouse.

Electing relief. To obtain relief under one or more of the above provisions, you must make a timely election on IRS Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief) and attach a statement to the return describing why you qualify for each type of relief sought. You can make the election up to two years after IRS begins trying to collect the tax from you.

Whether, and to what extent, you can take advantage of the above relief provisions depends on your own particular facts and circumstances. If you would like to confer on whether these provisions apply in your individual situation or have me request relief for you, please call 315-363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner