Divorce, Tax Liability, and Innocent Spouse Relief

Feb 23, 2017 | Written by: Diana N. Fredericks, Esq. and Daniel S. Makoski, Esq. | Share

Innocent Spouse Relief can be a strong defense for a spouse who discovers a tax liability during a divorce.  That is assuming the spouse qualifies as an “innocent spouse,” according to IRS guidelines.

The following Q&A addresses several hypothetical scenarios pertaining to eligibility for innocent spouse relief:

Q1. A wife tells her divorce attorney that she has never seen a tax document during her 20-year marriage.  The wife claims she does not know the name of the accountant and has never been to his office, however, she believes that her husband signed on her behalf.  The wife never worked during the marriage and the husband is the sole provider.  Does the wife have any claims she can assert against the husband if this were true?  Does the wife have any protections afforded to her?

A1. The wife has a strong case for an innocent spouse claim as to any tax liabilities that might exist. Even if she is unaware of their existence, the wife likely has a right to seek a determination that all or some portion of the liabilities belong exclusively to the husband.  In her application for a determination of innocent spouse relief, the wife must be able to show that a joint return was filed, that the liability is related to the husband’s income, that it would be unfair to hold the wife accountable, and that the husband and wife were not involved in a scheme to defraud any person, including the IRS. 

As a second option for the wife, if she can prove that she has never signed a return, she may be able to successfully argue that the return is fraudulent and that the husband is the person liable for the fraud.  This option is often difficult to prove and can have some unexpected outcomes that need to be carefully considered with an experienced tax attorney.

Q2. The facts are the same as above, except that the wife has an accounting degree and attained a CPA designation, but both have lapsed and she has not worked in that field in more than ten years.

A2. The wife’s education and professional license generally would lean in favor of the IRS and the husband in rejecting an innocent spouse determination.  When reviewing whether the wife knew or should have known about a liability, the IRS is able to make an inference that the wife, as an accountant, had special knowledge that created a duty for her to ask the right questions to investigate whether the husband’s tax liability had been satisfied. However, because the wife has not been active as an accountant for more than ten years, she may be able to successfully argue that she had no reason to know of the husband’s tax liabilities.

Q3. Does it matter if the husband in the above scenario is self-employed or works for a third party? 

A3. If the husband is self-employed, the wife has a greater likelihood of success in an application for innocent spouse relief.  The husband is in a position to control all of the available information and to manipulate the financial records of the business in a way that may appear to be accurate to the wife, despite the overstatement of expenses or understatement of income.  When the husband is employed by a third-party, he likely receives a Form W-2 or 1099 that states all of his income, as reported to the IRS by that third party. If the wife has access to this third-party information and does not investigate whether the husband has satisfied the tax liability, then the IRS may argue that she should have known about the liability and is therefore not entitled to relief.

Q4. Using Scenario #1, what if the husband is self-employed and the wife is listed as an owner of the business for purposes of incorporation, although she has no role in the business?

A4. The wife will need to overcome the presumption that as an owner she knows the business practices of the company. If she can show a true lack of involvement, e.g., she never goes to the office and the employees don’t know her well (or testify that she doesn’t work with them), she may be able to show to the satisfaction of the IRS that she has no actual knowledge of the business and that her name on the formation document is a matter of convenience only.

If a spouse is entitled to relief, he or she can ask the IRS to issue a release of lien certificate, which would be applicable to all property over which the IRS is entitled to a lien because of the liability. The release would only be for the innocent spouse’s share in the property, but can help the innocent spouse to take significant assets free of IRS interference.

Read more about innocent spouse relief.

To schedule a consultation to determine if you are eligible for innocent spouse relief, please contact Diana Fredericks at Gebhardt & Kiefer, P.C. at 908-735-5161.