Under the Separate Liability Election Rules— IRC Section 6015(c), an innocent spouse’s liability for understated taxes is limited to the tax he or she would have paid had the spouse filed a separate return. Each spouse claims the income and deductions that would have been taken if separate returns had actually been filed.
Innocent Spouse might be taxed only on his/her separate earnings
If the spouse seeking relief under the innocent spouse rules had actual knowledge of anything that resulted in an understatement, the separate liability rules don’t apply to those items. The IRS has to prove actual knowledge; it’s not up to the innocent spouse to prove lack of actual knowledge. In addition, the IRS cannot infer knowledge just because the innocent spouse had reason to know.
The Separate Liability Election Rules only applies if you, as the innocent spouse:
- make an election on Form 8857;
- make the election within two years of the first collection activity by the IRS;
- are no longer married to, or are legally separated from, your spouse;
- weren’t a member of your spouse’s household for the 12 months ending on the date you filed Form 8857. (Form 8857 is filed regardless of the type of innocent spouse relief sought.)
Even if you have been living apart for the requisite 12-month period, you don’t qualify for relief under the separate liability rules if you aren’t estranged. For instance, if your spouse is in prison or in the military and has been away for a year or so, you are not considered estranged (unless you can prove otherwise).
The Separate Liability Election Rules are in addition to the Traditional Rules and the Equity Relief Rules.
Ordinarily, if a taxpayer is granted innocent spouse relief, he or she is entitled to refund (if one is actually owing and subject to certain time limitations). However, refunds are not allowed if relief is granted under the Separate Liability Election Rules.
