Taxpayers often confuse an Innocent Spouse with an Injured Spouse. They are not the same. Innocent Spouse is term loosely used to describe one who is seeking relief from joint and several liability on a jointly filed tax return. The status must be requested within two years after collection action by IRS has commenced regarding a upaid joint tax return liability, whether from an IRS audit or relating to an unpaid balance due shown on the joint return. In actuality, Innocent Spouse is but one of three escape hatches from joint liability found in Code Section 6015. The other two possible avoidance mechanisms from joint liability are separation of liability and equitable relief. Innocent Spouse relief is requested on Form 8857 or in court pleadings. Visit steinbergtaxlaw.com for articles discussing Innocent Spouse relief.
An Injured Spouse claim involves a tax refund and not a tax owed. A spouse may be deemed an Injured Spouse when IRS has offset a joint return tax overpayments against certain unpaid obligations of the other spouse subject to tax refund offset such as child support, state income taxes, student loan obligations or other tax or non-tax specified debts. In such case a Notice of Offset will have been issued by the U.S. Treasury Department’s Financial Management Service.
The claiming Injured Spouse must meet certain conditions:
- Filed or filing a joint return
- The joint return shows a overpayment
- Not being legally obligated to pay the offset debt
- Report earned income such as wages, salaries or Self-employment income (Schedule C).
- Report tax paid in via wage withholding or estimated tax.
A qualifying Injured Spouse files Form 8379, Injured Spouse Allocation. Part III of Form 8379 is completed to allocate to each spouse separate joint return items including income, deductions, exemptions, credits, other taxes and payments. The IRS then figures the amount of the overpayment due separately to the Injured Spouse.
The Form should be filed with the joint return if the Injured Spouse knows of a debt that will be offset. In that case “Injured Spouse” should be noted in the upper left hand corner of page 1 of the joint Form 1040.
If the Injured Spouse learns of the offset after the joint return has been filed, Form 8379 is filed separately. It is important to attach to Form 8379 all Forms W-2, or 1099 reporting tax withholding. Caveat: Do not attach a copy of the joint Form 1040 if filing Form 8379 separately.
Who should prepare the form? Form 8379 is largely computational and a CPA should be able to competently prepare the form for the spouse. Before filing with the joint return, check if the debt of concern is subject to offset.
Form 8857 on the other hand involves determining mixed questions of law and fact regarding such factors as “actual knowledge” or “reason to know.” Reviewing Tax Court and appellate cases involves legal analysis that a tax lawyer is better trained to handle. Moreover, decisions about how and when to file Form 8857 or otherwise claim “Innocent Spouse” status may involve legal strategy concerning choice of forum, statute of limitations on collection or timing of a bankruptcy filing.