Knowledge and the Innocent Spouse Rule

The IRS recently reworked the innocent spouse rule as part of the fresh start program. This initiative waived some requirements for some payment plans and other programs. IRS bureaucrats didn’t make these changes out of the goodness of their hearts. The fresh start program was designed to increase voluntary compliance at a time when the IRS has fewer audit and collection resources. So, the changes to tax defenses, like the innocent spouse rule, were largely cosmetic.

Make no mistake about it. The IRS is still the world’s largest collection agency. It has tools at its immediate disposal, like wage garnishment and bank account levy, that normally require court orders. A Chicago tax lawyer is an important partner when you take on the IRS. One key element of the innocent spouse rule is that the IRS can still collect delinquent taxes. This rule simply changes the liability for these taxes.

Setting the Stage

Usually, married filing jointly tax rates are the lowest tax rates in the code. However, filing a joint return carries the added burden of both parties being liable for the tax due. In addition, under the IRS code, married taxpayers who file jointly are each liable for any additions to the tax, penalties, or interest associated with the account.

Both spouses sign the tax return, and both parties vouch for the accuracy of the tax that is owed. As such, if the IRS finds an increase in the amount of tax that is owed, it holds both parties equally responsible for the increase.

Courts have supported the IRS policy of targeting either spouse for a balance that is due. Spouses, even if both agree, may not insist that the IRS first try to collect from one spouse before going after the assets of the other. In addition, courts have also held that the IRS is not bound by divorce decrees and other otherwise legally binding agreements reached by the spouses.

Nuts and Bolts

Innocent spouse relief relieves a person of any tax, interest, and penalties associated with the account, although the taxpayers are still held jointly and severally liable for any amounts that are not granted innocent spouse relief. The following requirements must be met in order for IRS innocent spouse relief to be granted:

• Joint return,
• Tax liability understatement,
• You did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed (Absence of “Actual Knowledge” or “Reason to Know”). And
• Considering all facts and circumstances, it would be unfair to hold you liable for the understated tax. (“Unfairness”).

Actual knowledge is hard to prove. People frequently sign documents they don’t fully understand. So, most of the innocent spouse claims a Chicago tax lawyer handles involve constructive knowledge(reason to know). Some factors include:

• Financial situation vis-a-vis claimed income (people who earn $60,000 a year don’t take long European vacations),
• Your business experience and educational background,
• Extent of your participation (did you benefit from the tax fraud),
• Did you ask questions or did you just sign the return (willful blindness), and
• Was the current delinquency part of an ongoing pattern.

The “reason to know” test is applied to determine whether someone is eligible for innocent spouse relief because the IRS will not grant a reprieve if you knew there was a problem when the return was filed. Knowledge makes you an accomplice to understatement of tax and ineligible for assistance.

Count on a Diligent Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a confidential consultation with an experienced debt reduction attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.

Source:

irs.gov/payments/get-help-with-tax-debt