I knew my husband excluded income from our joint tax return, but he lied to me. Will the IRS still hold me responsible for unpaid taxes?

It is not sufficient to simply say that your husband lied to you regarding intentional omissions from a joint income tax return.  Lack of knowledge regarding tax laws is also not a valid argument when trying to obtain relief from a tax deficiency arising from one spouse’s failure to include income or understate tax owed on an income tax return.  It is also unacceptable to say that you were not aware of the tax consequences of failing to include income.

Most often, it is the husband who prepares and files the income tax return when couples are filing jointly. Every spouse has the burden to investigate when she suspects that the information the husband is providing her is incorrect. The IRS rarely grants innocent spouse relief, especially in situations where the primary argument is that the other spouse lied on an income tax return.

However, if the spouse seeking relief can prove that she did make an effort to inquire and was repeatedly lied to about the couple’s finances then the IRS can release a spouse from liability for a tax deficiency. In order to obtain a release from liability for a tax deficiency because of your spouse’s failure to include income, the IRS will look at several factors to determine whether you can also be held responsible for paying the additional tax and penalties.

1) Educational background and the ability to understand finances is a factor that will determine whether a spouse can be held liable for unpaid taxes. Those with a limited education and virtually no experience with handling the family’s finances will likely obtain relief, but those who are actively involved in managing the couple’s finances will find it much harder to convince the IRS that they are entitled to relief.

2) Spouses seeking relief must lack knowledge or experience with financial matters in order to be exempt from liability for unpaid taxes.  Joint bank accounts and a wife’s knowledge of the husband’s income are factors that weight against a spouse seeking relief from liability. According to the IRS, having access to a joint bank account and knowing the sources of the spouse’s income provide enough reason for a spouse to know if a return is inaccurate or at the very least understand that there may be questionable items on an income tax return.

3) Being separated or divorced is a positive factor that works in favor of the spouse seeking relief, but marital status alone will not guarantee relief. The IRS looks at the complete picture of how the couple interacted during the marriage regarding their finances when deciding to release a one spouse from joint tax liabilities.

Case Studies: Spousal Liability and Innocent Spouse Relief in Tax Matters

Case Study 1: Unreported Income and Spousal Liability

Jane and John are a married couple filing joint tax returns. Unknown to Jane, John intentionally excludes a significant portion of his income from their tax return, resulting in an underpayment of taxes.

Several years later, the IRS audits their return and discovers the unreported income. Jane is shocked to learn about John’s deception and worries if she will be held responsible for the unpaid taxes.

The IRS examines the couple’s situation and considers various factors to determine Jane’s liability. They assess Jane’s educational background, financial knowledge, and involvement in managing the couple’s finances.

If Jane can demonstrate that she had limited knowledge of their financial affairs and made reasonable efforts to inquire about their tax obligations, she may be granted innocent spouse relief, relieving her from the tax liability.

Case Study 2: Financial Abuse and Innocent Spouse Relief

Sarah and Mike are married, and Mike is the primary earner in the family. Sarah has limited knowledge of their finances as Mike handles all financial matters, including filing their joint tax returns.

Unbeknownst to Sarah, Mike intentionally underreports their income and manipulates deductions to reduce their tax liability. Sarah suspects something amiss but is afraid to question Mike due to his controlling behavior.

Years later, the IRS investigates their tax returns and uncovers the discrepancies. Sarah is devastated to learn about Mike’s financial abuse. She seeks innocent spouse relief, arguing that she had no knowledge of the underreported income and was coerced into silence by her husband’s manipulative behavior.

The IRS considers Sarah’s lack of financial education, her limited involvement in financial decisions, and evidence of abuse when evaluating her eligibility for relief. If she can establish her innocence and show that she was a victim of financial abuse, the IRS may absolve her of the tax liability.

Case Study 3: Divorce and Joint Tax Liability

Lisa and David are going through a contentious divorce. During their marriage, David managed their finances, including filing joint tax returns. Lisa trusted David with their financial matters but suspected that he was hiding income and assets.

After their divorce, Lisa discovers evidence of David’s deceit, including unreported income on their past tax returns. She worries about her potential liability for the unpaid taxes. As part of their divorce settlement, Lisa obtains innocent spouse relief, which relieves her of the tax liability for the undisclosed income.

The IRS takes into account their divorce and the breakdown of their financial partnership when evaluating Lisa’s eligibility for relief. While being divorced alone doesn’t guarantee relief, the circumstances surrounding their divorce, combined with Lisa’s lack of knowledge and involvement in the financial matters, support her claim for innocent spouse relief.