CARL WATTS & ASSOCIATES

June 6th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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Injured Spouse Relief
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Here is a scenario for you to consider:
You got married and now you’re filing a married filing jointly tax return with the IRS.
Congratulations and, well, of course, that’s wonderful news! Most of the times.

But what if you find out that your refund was held because of a prior tax debt? What if it turns out your beloved spouse owed back taxes from before you were married? Is there anything you can do?

Well, this is what the injured spouse relief is all about.

The IRS says that if you file a joint return and all or part of your refund is applied against your spouse’s past-due federal tax, state income tax, child or spousal support or federal non-tax debt (such as a student loan), you may be entitled to Injured Spouse Relief.

To qualify as an injured spouse:

  • You must file a joint return;
  • You must have made and reported income such as wages or taxable interest on your joint return;
  • You must have made and reported tax payments, either withheld from wages, through estimated tax payments, or by claiming a refundable tax credit;
  • You must not be legally obligated to pay the past due amount (meaning you weren’t married to your spouse when he/she incurred the debt).

Under these circumstances you may request your portion of the refund by filing the Injured Spouse Allocation Form 8379.

You can submit Form 8379 along with your tax return and, if you send in a paper return, make sure to write “INJURED SPOUSE” at the top left corner of your 1040.

You can also file Form 8379 by itself, just make sure that you list both your and your spouse’s social security numbers in the same order as they appeared on your income tax return.

Only the IRS can determine the amount of tax owed by or overpayment due to each spouse mostly because allocation for couples from the community property states will be different from couples who aren’t in community property states.

The IRS will use each state’s rules to determine the amount, if any, that should be refunded to you as the injured spouse. Under state community property laws, 50% of a joint overpayment (except the earned income credit) is applied to non-federal tax debts such as child or spousal support, student loans, or state income tax. However, state laws differ on the amount of a joint overpayment that can be applied to a federal tax debt.

You should consider whether filing separately may be to your advantage, but if you qualify for any of the tax credits that aren’t allowed to couples who file separately then the Injured Spouse Allocation is your best choice despite the usual delay to your refund.

If you believe you are an injured spouse and live in a community property state, or if you want to make sure you properly fill out Form 8379, you should seek help from a professional.
Innocent Spouse Relief vs. Injured Spouse Relief
Yes, they may sound similar but they are, of course, different.

While the Injured Spouse may be entitled to receive relief from debt incurred by the other spouse before marriage, the Innocent Spouse may be entitled to relief when the other spouse makes false reports on a joint return.
Until 1988, the Innocent Spouse Relief was the only option for a married taxpayer to be relieved of a tax liability stemming from their spouse’s errors.

Unlike the Injured Spouse Relief, in order to qualify for the Innocent Spouse Relief, you must prove you had no knowledge of the errors leading to a back tax debt when you signed the tax return.

There are three ways to qualify for Innocent Spouse Relief:

  • Separation of liability (provides for the allocation of additional tax owed between you and your spouse or former spouse because an item was not reported properly on a joint return. The tax allocated to you is the amount you are responsible for);
  • Pure innocent spouse relief (additional tax you owe because your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits); or
  • Equitable relief (may apply when you do not qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return. You may also qualify for equitable relief if the correct amount of tax was reported on your joint return but the tax remains unpaid).
Generally, the following conditions are required for you to qualify for the Innocent Spouse Relief:
  • You must have filed a joint return which has an understatement of tax;
  • The understatement of tax must be due to erroneous items of your spouse (or former spouse);
  • You must establish that at the time you signed the joint return, you didn’t know and had no reason to know there was an understatement of tax;
  • Determine that the understatement did not bring a significant benefit to you. The deception is not considered a significant benefit simply because your spouse supports you. But if your spouse was handling your investments and lied about them, you significantly benefited because your tax was understated.

To request the Innocent Spouse Relief you need to fill out Form 8857 as soon as you know about the tax debt, but no later than two years from the first time the IRS tries to collect the tax debt.

You will know about the tax debt when:

  • The IRS examines or audits your income tax return; or
  • The IRS sends you a letter; or
  • The IRS keeps your tax refund to pay the debt.

Fill out Form 8857 and attach a statement explaining why you qualify. Put your name and Social Security number on the statement. If you request innocent spouse relief for more than one year, file one Form 8857, but for each year do a separate statement that explains why you qualify.

Do not file Form 8857 with your income tax return.

Most importantly, keep in mind that each case is different and may require an individual approach, so professional help is certainly the best option for your case.