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Filing for Separation of Liability Relief

Many couples choose to file their taxes jointly and while this carries many benefits, there are also certain risks involved. For example, even if the couple eventually obtains a divorce, both spouses will be held liable for any additional taxes, interest, or penalties. Fortunately, there are some exemptions that can give a former spouse some relief from tax liability. Separation of liability relief, which allocates the amount of interest and penalties between each former spouse, is one such form of relief.

Filing Requirements

Certain taxpayers who are being held liable for an understated tax may be able to avoid legal responsibility by filing for separation of liability relief, which requires that each party be held liable only for the amount specifically allocated to them. To request relief, a petitioner must have filed a joint tax return and satisfy one of the following requirements:

  • The applicant is no longer married to, or is legally separated from, the spouse with whom he or she filed the return; or
  • He or she was not a member of the same household as the spouse with whom the petitioner filed a tax return at any time during the previous one year period.

Individuals are not members of the same household if they are living apart. However, the IRS does consider former spouses members of the same household if they:

  • Live in the same dwelling;
  • Live separately, but are not estranged, and one of the individuals is temporarily absent from the household; or
  • Either former spouse is temporarily absent from the household and it is reasonably assumed that he or she will return to the household, which is also being maintained in anticipation of that party’s return.

If these requirements are satisfied, the eligible individual must file Form 8857. In some cases, even if a person meets the requirements, he or she may still be barred from receiving separation of liability relief, but only if one of the following situations apply:

  • The IRS proves that the applicant and his or her former spouse transferred assets to each other as part of a scheme to defraud the IRS, a creditor, a former spouse, or a business partner;
  • The IRS proves that at the time the applicant signed the joint return, he or she had actual knowledge of the errors that gave rise to the deficiency; or
  • The applicant received property from his or her former spouse to avoid a tax.

Actual Knowledge

An applicant is considered to have had actual knowledge of an error on a tax return if he or she knew:

  • That the other party received unreported income;
  • Of facts that led to an incorrect deduction or unallowable credit; or
  • That the expense was not incurred.

Even if an applicant had actual knowledge of the error, he or she may still qualify for relief if it can be established that the applicant was the victim of domestic violence before signing the return and because of that abuse, he or she did not challenge the items at issue on the return.

Owing money to the IRS can lead to a taxpayer’s wages being garnished, bank levies, and the placement of liens on valuable property. In some cases, this can be avoided for those who qualify for relief, so if you are being investigated by the IRS and you live in the Daytona Beach, Orlando, Miami, or Jacksonville areas, please contact Ronald Cutler, P.A. by calling 386-788-4480 and we will help you set-up a free consultation. If you are unable to meet during the week, we would be happy to reserve an appointment for the weekend.