As an Orange County Tax Attorney and CPA, I often encounter clients facing tax liabilities due to discrepancies in jointly filed tax returns. One of the most critical relief provisions available to qualifying taxpayers is Innocent Spouse Relief.
In this blog, we’ll delve into what Innocent Spouse Relief is, how it works in California, and who may qualify.
What is Innocent Spouse Relief?
Innocent Spouse Relief is a tax provision under the Internal Revenue Code (IRC) 6015 that allows individuals to be relieved of responsibility for paying taxes, interest, and penalties if their spouse (or former spouse) improperly reported or omitted items on their joint tax return. This is because the IRS recognizes that in some cases, one spouse might be unaware of these inaccuracies.
The primary benefit of successful innocent spouse relief is the relief from joint tax liability, meaning you will not pay the portion of the tax bill that by law was due.
California, conforming largely to federal tax laws, offers similar relief under specific conditions.
What is a Joint Tax Return?
Let’s take a quick step back and define joint tax returns.
A joint tax return is a single tax return filed by a married couple who opts to combine their income, exemptions, deductions, and credits to report their taxes together. In the United States, married couples have the option to file their taxes jointly or separately each year. Filing jointly usually provides several benefits and is often the preferred filing status for married couples.
Here’s a closer look at what it entails:
Features of a Joint Tax Return:
- Combined Income: The incomes of both spouses are combined to create a single total taxable income. This includes wages, salaries, dividends, interest incomes, capital gains, and any other sources of income.
- Shared Deductions and Credits: Deductions such as mortgage interest, property taxes, medical expenses, and charitable contributions are combined and claimed on the same return. Similarly, tax credits for education, dependent care, or energy-saving home improvements are consolidated.
- Tax Liability: The couple is jointly responsible for the tax liability, as well as any interest or penalties that might accrue from the date the return is filed. This means that both individuals are equally responsible for the full amount of the tax due, even if they later divorce or if one spouse earned all the income.
- Benefit of Lower Tax Rates: Often, filing jointly offers more favorable tax brackets and other tax benefits, such as higher income thresholds for tax credits and deductions, compared to filing separately. This can result in a lower combined tax liability.
How Does Innocent Spouse Relief Work in California?
While California tax laws generally align with federal regulations, it’s crucial to understand that the California Franchise Tax Board (FTB) handles Innocent Spouse Relief requests in the state.
The process involves filing a formal request with the FTB, where you must prove that you meet the criteria for relief. These criteria typically include proving that you were unaware of the errors resulting in understated tax or that it would be unfair to hold you responsible for the tax liability.
The FTB evaluates several factors when considering your application, such as:
- Your involvement in the household’s financial affairs
- Whether you’ve received a significant benefit from the understated tax
- Your educational background and business experience
- Any deceit or evasiveness of your spouse concerning the couple’s finances
Who May Request Innocent Spouse Relief?
Qualification hinges on various factors. You may qualify if:
- You filed a joint return which has an understatement of tax due to erroneous items of your spouse (or former spouse).
- You establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax.
- Considering all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
Additionally, there are specific time frames within which you must request this relief. Generally, you must file the request within two years after the date the IRS began collection activities against you.
What Types of Tax Relief Can You Receive?
Under the IRS Code 6015, there are three main types of tax relief options available. These types are designed to accommodate different situations where one spouse believes they should not be held responsible for tax liabilities due to the actions or inactions of their spouse or ex-spouse.
The three types of relief are:
- Innocent Spouse Relief (IRC 6015(b)):
- This relief option is for taxpayers who filed a joint return and are seeking relief from liability for tax, plus associated interest and penalties, that arose from erroneous items of their spouse (or former spouse). Erroneous items can include unreported income or incorrect deductions, credits, or basis.
- To qualify, you must prove that when you signed the joint return, you didn’t know, and had no reason to know, that there was an understatement of tax. Additionally, it must be unfair to hold you liable for the understatement of tax, considering all the facts and circumstances.
2. Separation of Liability Relief (IRC 6015(c)):
- This type of relief divides the additional tax owed (plus interest and penalties) on the joint return between you and your spouse (or former spouse) from whom you’re separated or divorced. You’re then responsible only for the amount of tax allocated to you.
- Eligibility for this relief generally requires that you are no longer married to, or are legally separated from, the spouse with whom you filed the joint return, or you were not a member of the same household as that spouse at any time during the 12 months preceding the filing of the relief request.
3. Equitable Relief (IRC 6015(f)):
- If you do not qualify for Innocent Spouse Relief or Separation of Liability Relief, you may still qualify for Equitable Relief. This relief applies when, considering all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax.
- Equitable Relief can be requested for any unpaid taxes or for any deficiency, and it’s available for items not reported on the return as well as for correctly reported but unpaid tax. Factors considered include whether you were a victim of domestic abuse, whether you’ve significantly benefited from the understatement, and your level of involvement in the household finances and the erroneous items.
For California taxes, the FTB closely follows federal provisions and are therefore broadly comparable to the federal relief options discussed above.
When considering requesting relief, it’s important to understand the specific conditions, qualifications, and procedures for each type of relief. Typically, a thorough review of the tax situation, often with the assistance of a tax attorney, is essential to determine the most appropriate and beneficial form of relief based on tax law and your individual situation.
Why is a Tax Attorney Important?
Navigating the complexities of Innocent Spouse Relief can be daunting. A skilled tax attorney can provide crucial guidance through the intricate process, ensuring that your application to request relief is robust, well-documented, and timely. They can help you:
- Understand your legal rights and options
- Gather and present the necessary documentation to support your case
- Represent you in dealings with the California Franchise Tax Board
- Negotiate on your behalf and advocate for your best interests
Conclusion
If you’re facing tax liabilities due to inaccuracies on a jointly filed return, Innocent Spouse Relief could offer a way out. However, the intricacies of such claims, especially in the context of California’s tax laws, necessitate professional guidance from tax attorneys.
As an Orange County Tax Attorney dedicated to assisting clients with complex tax issues, I can help you navigate this challenging process, aiming for a resolution that protects your financial interests.
FAQs
Does a registered domestic partnership qualify for innocent spouse relief?
Yes, a registered domestic partnership in California does qualify for innocent spouse relief under the state’s tax laws. Individuals in a registered domestic partnership can file joint tax returns and are subject to the same responsibilities and protections, including innocent spouse relief.
How long does it take for the IRS to make a decision on my Innocent Spouse Relief application?
The processing time can vary, but it generally takes several months. The complexity of your case and the IRS’s current backlog can affect the duration.
What happens if my Innocent Spouse Relief is denied?
If your application is denied, you have the right to appeal the decision. The IRS provides instructions on how to file an appeal in the determination letter.