The majority of Americans don’t pay the correct amount of tax throughout the year, so you are not alone if you owe back taxes. While this issue is common, it can cause significant financial stress, especially if you find out that your partner has actually committed tax fraud and you didn’t know about it. Fortunately, you can claim innocent spouse relief in such a case. Let’s examine what this is and how you can tell whether you are eligible.
WHAT IS INNOCENT SPOUSE RELIEF?
If you or your family haven’t paid all of your taxes on time, this means that you are in debt to the IRS. Unfortunately, some people are put into this position by their spouse, for example, if a spouse has kept knowledge of extra income or lottery winnings from them, and the spouse didn’t put these on the tax return. Married couples are jointly responsible, so you may worry about having to bear the negative consequences of your spouse’s mistake.
There is a relief system in place for people who find themselves in this situation. If you didn’t know that your partner omitted something or incorrectly reported earnings on the tax return, you could be relieved of the responsibility to pay both the tax and the interest or penalties that have accumulated since. With the help of a competent and experienced attorney, you could fight any tax debt your spouse accrued through individual or self-employment income.
DO YOU QUALIFY?
When you come to us with your tax issue, we will evaluate your situation to determine how to best handle it. We will need to check several factors before deciding that this type of relief applies to your situation, as the IRS is quite specific about who is eligible. Certain types of taxes are not included, for example, Individual Shared Responsibility payments, business taxes, or Household Employment taxes.
All kinds of factors will be taken into consideration by the IRS prior to making a final decision, so it’s important that you tell us the relevant details of your case. You may have a better chance of claiming relief if your partner abandoned you or if you have separated or divorced from them. However, you may not be eligible if you received a direct or indirect financial benefit as a result of the understatement and back taxes.
Let’s briefly explore what counts as an erroneous item and is covered under this relief. There are two main types: underreported income and incorrect deductions, credit, or basis. In the first case, your spouse has incorrectly reported their gross income, and, as a result, has not paid the correct amount of tax. In the second case, they have made a deduction or received a credit that they were not eligible for.
While the first type of erroneous item is fairly straightforward, your situation may be more complicated if your spouse was guilty of the second. This is the case if, for example, they are self-employed and claimed an expense that they never actually paid or that does not qualify as a deductible expense.
The Four Criteria
If your spouse was found guilty of either of these erroneous items, you will need to figure out whether you can be relieved of the payment. There are four criteria that determine eligibility, and you have to meet all of them to qualify. The first one is that you filed a tax return that has an erroneous item on it, and that the IRS has discovered this. The second is that you did not know about this at the time of signing and there was no valid reason for you to know.
Thirdly, it has to be considered unreasonable to hold you accountable for the payment after taking all of the different factors into consideration. For instance, it would not be considered unreasonable for you to pay taxes if you received a significant financial benefit from the underreported income. Finally, you must not be involved in a fraudulent transfer of property with your partner.
WHAT IS REASON TO KNOW?
If you actually knew about the understatement of taxes, you won’t be eligible for the innocent spouse relief at all. However, there is another reason why the IRS might decide that you aren’t eligible, and it is called “reason to know.” This applies in a situation where you had a reason to know about the issue, for example, if the numbers are very different from what could be expected and you were aware of this at the time.
In such a case, it was your responsibility to discuss this with your partner. The IRS can take a variety of factors into consideration when determining reason to know. These include your educational background, your financial situation, whether you asked your partner about a suspicious figure on the return, and whether the erroneous figure was vastly different from the pattern created in previous years. If any of these apply, you should have known there was an issue.
Sometimes, you can claim partial relief if you had reason to know or if you knew about the underreporting, but not the whole extent of it. For example, you may have been aware that your spouse won $10,000 in the lottery and didn’t put this on your tax return, but when the IRS examines the situation, they find that your partner actually won $100,000 and didn’t report any of it.
In such a situation, you will be liable for the tax owed on the $10,000 you knew about, but you won’t be liable for the money owed on the rest of the income. This is a more tricky situation and will require proof that you were only aware of part of the issue. It is highly advisable that you hire a tax attorney who’s familiar with the national and local laws if you think such a case might apply to you.
THE PENALTIES FOR OWING BACK TAXES
It’s important that you take advantage of relief if you are eligible, as the consequences of not paying your taxes can be quite severe. Not only do you eventually have to pay back the whole amount, but you will also accrue interest and other charges. You may need to pay an extra 0.5% of your total for every month that you delay, up to 25% of the full amount. To add to this, there will be other penalties to pay, so your balance can increase rapidly.
In most cases, people don’t pay their taxes because they are either misinformed or they don’t currently have the money to do so. In the latter situation, you’ll need to avoid paying these extra penalties at all costs because they will cause your situation to deteriorate further, and you might need to get into further debt to pay them off. By hiring a competent attorney, you can claim relief and improve your financial situation considerably.
Owing back taxes is a very stressful experience, especially as extra fees and penalties that you may not be able to afford are added to your balance. If your partner withheld information from the IRS and you didn’t know about it, you could be eligible for innocent spouse relief. To find out more, contact us at Geaux Tax Resolution in Lafayette, LA. Our experienced tax lawyers can help you to gain clarity and control over your situation.