What Is the Innocent-Spouse Rule?

The innocent spouse rule is a provision of U.S. tax law, revised most recently in 1998, which allows a spouse to seek relief from penalties resulting from underpayment of tax by a spouse. The rule was created partly due to spouses not telling their partners the entire truth about their financial situation.

Understanding the Innocent-Spouse Rule

The innocent spouse rule allows a taxpayer to avoid a tax obligation arising from errors made by a spouse on a joint return. Most commonly, the error involves unreported income or an inflated deduction.

To be eligible for this relief, the taxpayers must meet the following criteria:

  • They must have filed a joint return with an erroneous understatement of tax responsibility relating directly to their spouse.
  • They must have had no knowledge of the error.
  • Once the error has been identified, the IRS must agree that it is fair to relieve the taxpayer of the tax in question.
  • The taxpayer must apply for relief within two years of the IRS initiating collection.

To apply for relief, a taxpayer must file IRS form 8857. Many taxpayers who are no longer married also apply for the separate election liability. This provision can provide similar relief to the innocent spouse rule but it requires that the spouses no longer be married due either to divorce or death.

Another difference lies in the extent to which the court might decide that the taxpayer shares in the liability even if they were unaware of the error. Under the separate election liability rule, the court may determine that the taxpayer bears some liability for taxes owed due to the oversight.

Key Takeaways

  • The innocent spouse ruling presupposes that a spouse was not aware of the filing error made by their spouse, and so are not held liable for the tax implications and penalties.
  • Some feel the ruling is too vague, and that it places too much of a burden on the claimant to prove they investigated the wrong-doing. It can tear apart relationships due to a simple tax filing mistake.
  • While most tax errors fall on the IRS to prove non-compliance, the innocent spouse ruling places the necessity for proof on the claimant themselves.

The Lack of Knowledge Clause for Innocent Spouse Relief

The most problematic of the innocent spouse requirements listed above is that the taxpayer not know of the error in question. Some court rulings have held the complaining spouse to what might seem like a higher standard than is explicitly stated in the rule: that they should have known about the error, even if there is no dispute that they did not know.

Others have ruled that the spouse cannot receive relief unless they have carefully reviewed the tax return and personally investigated suspicious sections. Many commentators believe that these requirements place an undue expectation on well-educated claimants.

While most tax disputes place the burden of proof of non-compliance on the IRS, the lack of knowledge portion of the rule essentially forces the taxpayer to prove that they did not know of the error. Otherwise, they will be ruled liable for the erroneous filing.