According to Internal Revenue Service (IRS) Commissioner Charles Rettig, in testimony before the Senate Finance Committee in April 2021, unpaid federal taxes total nearly $1 trillion a year, saying his agency is being “outgunned” by increasingly sophisticated tax avoidance schemes.
What if your spouse is one of those who is underreporting his or her income and avoiding taxes? Are you liable? Can the IRS seize your bank account and assets to make good on the deficient payment?
The answer is, “It depends.” The biggest factor is whether you and your spouse filed jointly or separately. If you filed jointly, there are options to have your liability forgiven for your spouse’s transgression, but otherwise, you may be liable. If you filed separately, then you generally have no liability for your spouse’s taxes.
If you find yourself in trouble with the IRS and you reside in Fort Lauderdale, anywhere in Broward County, or in the surrounding areas of South Florida, including Palm Beach, Miami-Dade, and Collier counties, contact Zuckerman Law, LLC. I will meet with you to discuss the circumstances and advise you of your options to get tax relief.
Liability for Your Spouse’s Taxes
If a married couple files their federal taxes jointly, they are able to take advantage of certain tax breaks, including higher income thresholds for certain deductions. In addition, the American Opportunity Tax Credit or the Earned Income Tax Credit (EITC) may be available.
On the flip side, if one spouse fails to report all of his or her income, the IRS has a system in place to catch tax avoidance called the Automated Underreporter (AUR) function, which compares tax returns to information submitted to the IRS by employers, banks, businesses, and other payers on forms like the W-2, the 1099, and the 1098.
If a discrepancy is found on your tax return, the IRS system will issue what is called Notice CP2000. The notice will inform the taxpayers of the amount of taxes due, plus penalties, along with a convenient envelope for making a payment. For a joint filing discrepancy, the agency requires that both spouses sign and return the form with their remittance.
If you file separately as a married couple – called “married, filing separately” – then you have no liability for your spouse’s underpayment of taxes for that year. If in a previous year, you filed jointly and a discrepancy is found, you definitely can be liable for payment regardless of how you subsequently filed.
Relief for Innocent Spouses
If you did file jointly and your spouse failed to report all income, you may qualify to avoid liability under a program called “innocent spouse relief.” This program, however, is available only for individual income and self-employment taxes. It is not available, for instance, for business income or trust fund liabilities.
The IRS sets four qualifications for innocent spouse relief:
You filed a joint return which has an understatement of tax due to erroneous items of your spouse (or former spouse). Erroneous items mean unreported income or incorrect deductions or tax credits.
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.
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
It can get a little tricky to prove that you had no knowledge or reason to know of the underreporting or that it would be unfair to hold you liable. For these qualifications, you will need the guidance and help of an experienced tax attorney.
There are two other types of relief that may be available: relief by separation of liability and equitable relief.
Separation of liability involves allocating the understatement of tax (plus interest and penalties) between you and your spouse. One of two conditions must be met:
You are no longer married to, or are separated from, the spouse with whom you filed the joint return with the understatement; or
You are no longer a member of the same household as your spouse; that is, you are living apart and are estranged.
Equitable relief is available if you do not qualify for innocent spouse relief or separation of liability. Equitable relief is available for both understatement and underpayment of taxes. Several factors will be considered by the IRS, including any significant economic hardship you may suffer if forced to pay for your spouse’s errors. This generally means you would be unable to meet your basic living expenses if required to pay.
Getting the Experienced Legal Guidance You Need
All three of the relief options mentioned above hinge on a lot of factors that can be interpreted in both favorable and unfavorable ways by the IRS. You may argue, for instance, that you had no knowledge that your spouse was not including income from a second job on your joint return, and the IRS might counter that you should have known about it given the circumstances. That’s where the guidance and counsel of an experienced attorney can prove invaluable.
If you’ve suddenly received a CP2000 notice in the mail requesting payment (plus interest and penalties) for underreported income by your spouse, you will definitely be considered equally liable if you signed a joint return. But as detailed briefly above, relief may be available.
Whatever your tax and IRS concerns are, if you’re in the Fort Lauderdale area, or anywhere in South Florida, contact Zuckerman Law, LLC. I have helped countless others like you with their tax issues, and I will meet with you to discuss your situation and help you seek the relief you need and qualify for.