Thursday, January 29, 2009

Injured Spouse, Innocent Spouse and Community Property

From the archives of IRS codes compiled by Lunar Eclipse for HR Block client #123

Innocent Spouse Relief: Publication 971 (rev April 2008)

When you file a joint income tax return, the law makes both you and your spouse responsible for the entire tax liability. This is called joint and several liability. This applies to not only tax due but to additional tax the IRS determines as well as credits of you and your spouse or former spouse.

In some cases a spouse or former spouse will be relieved of the tax, interest, and penalties on a joint return. The law changes for those living in community property states (later on that). There are three types of relief for an innocent spouse 1) innocent spouse relief 2) separation of liability relief 3) equitable relief. In order to see if you qualify for Innocent Spouse Relief log onto

File Form 8857 to request relief within the first two years of your tax return in order for the IRS to begin process. The IRS will review the request for Innocent Spouse Claim and let you know if you qualify.

How to qualify?

- You must have filed a joint return which has an understated tax.

- The understated tax must be due to erroneous items of your spouse or former spouse.

- You must establish that at the time you signed the joint return you did not know and had no reason to know that there was an understated tax.

- Taking into account all of the facts and the circumstances it would be unfair to hold you liable for the understated tax.

Why would I be denied?

- The IRS proves that you and your spouse transferred assets to one another as part of a fraud scheme.

- The IRS proves that at the time you signed your joint return you had actual knowlege of any erroneous items giving rise to the deficiency that are allocable to your spouse.

- Your spouse transferred property to you in order to avoid tax or pentalty of tax.

The Innocent Spouse Relief was designed to protect the spouse that had no aware of their spouse's dealings. I have personally seen this twice in three years. To me in my professional opinion this has to do with taxes owed due to one spouse not disclosing to the other about the extra income and not reporting it, the IRS finds out and sends you a lovely little letter.

In the case of an IRS offset due to past debt garnishing refunds like student loans and back child support the form 8857 is not for you, see Injured Spouse.

I have been asked, 'can't I file married filing separate?' In the case of Married filing separately, you loose EIC, and you automatically become ineligible for almost all credits including education and child tax credits. Using form 8857 allows you to be eligible for the credits you would normally lose and keep that Married Filing Joint (MFJ) status but separating your liability. In the case of Community property... well... then it gets ugly. Lets read on.

Injured Spouse Allocation Form 8379 (Revised December 2007)

Form 8379 is filed by one spouse (the injured spouse) on a jointly filed tax return when the joint overpayment was or is expected to be applied (offset) to past due obligation of the other spouse. By filing 8379 the injured spouse may be able to get back his or her share of the joint return.

What is an debt that the IRS or federal goverment can offset from your tax return?

- Past Federal taxes owed

- Past State Income Taxes owed

- child or spousal support

- Student Loans

You can be eligible to file if you are not legally obligated to pay the past due amount, and you made and reported payments such as federal income tax withheld from wages, or estimated tax payments or claimed a refundable tax credit such as Earned Income Tax Credit etc.. Do not file form 8379 if you have filed Innocent Spouse Relief.

To determine if a debt is owed and whether an offset will occur contact the US Treasury department's Financial Management Service 1-800-304-3107.

You can file an 8379 with the 1040, or 1040x or by itself after the return has been sent. Make sure copies of all your w-2's and income documents are sent along with it.

How long will this take? 11 Weeks to 14 weeks when sent with the 1040, 8 weeks if sent after.

yes... that sucks.

What happens if you live in a community property state?

Community Property Publication 555 (Rev. May 2007)

Community property states for the simplest explanation means, states that have elected to pool both spouses resources together as 'community property.'

Who is a community property state? Arizone, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconson.

For the purposes of an offset even if you are not the injured party your return will be offset to satisfy the debt even if you are supplying the sole income. You can file a form 8379 Injured Spouse and have half the community income allocated back to you, but expect 11 weeks for the IRS to go through the process.

Each community state is different, California for the purposes of satisfying an offset will take 100% of the community refund to satisfy the debt even if you file an 8879. Texas either takes 50%, 75%, or 100% of the refund to satisfy the debt, Washington and the rest are a 50% 50% state.

So, for the person who asked 'What happens when my spouse has back child support that they take out of his refund?' This is your answer.

1 comment:

Anonymous said...

This is very helpful. It clarifies things for me. I was searching on line when I come across this form ( used it and it worked. You might want to try.