Innocent Spouse Relief Two-Year Limit Change

What is Innocent Spouse Relief?

According to the Internal Revenue Code, a married couple is allowed to file a joint tax return and thereby receive certain benefits and tax credits. Additionally, by filing jointly, each individual is jointly and severally liable for any taxes, interest, and penalties due on the return. This means that either spouse can be liable for the full amount of the taxes, even if one spouse under-reported income or the couple later divorces. For this reason, Innocent Spouse Relief is available when it would be unfair to hold both spouses responsible for a tax liability.
Innocent Spouse Relief Two-Year Limit Change

Types of Innocent Spouse Relief?

An individual can file for “classic” innocent spouse relief, separate liability, or equitable relief. Each type has different eligibility requirements. For example, “classic” innocent spouse relief requires that the couple filed a joint tax return with a misrepresentation of a tax, deduction, or credit. The “innocent spouse” must prove that, at the time the return was signed, he or she had no reason to know of the other spouse’s error.

Additionally, equitable relief is only available to anyone who does not qualify for either innocent spouse relief or separate liability. When assessing a claim for equitable relief, the IRS will take into consideration all of the facts and circumstances to decide whether it would be unfair to hold the “innocent spouse” liable. Unlike the other two types of relief, which only apply to an understatement, equitable relief is applicable to an underpaid tax as well.

The Two-Year Limit Change

In 2011, the Internal Revenue Service adopted a new rule to eliminate the two-year time limit that had applied to equitable spouse relief. Under the two-year limit, an individual was required to apply for equitable spouse relief within two years of the first IRS collection activity on the tax. Pursuant to the new rule, this limit no longer applies to any new or current equitable relief requests.

Additionally, the IRS will allow any individual whose application was denied due to the two-year limit to reapply by filing another Form 8857. Equitable relief must still be requested within the statute of limitations applying to the collection of the tax and any refund, however. Typically, the statute of limitations for collection is 10 years after the tax was first assessed.

How Does the Change Affects Innocent Spouse Relief?

Elimination of the two-year limit will make it easier for individuals to apply for equitable relief, especially in situations when one spouse conceals information. It will help those who did not discover the error until later, or were unable to challenge the other spouse.

Peter Wendt is a writer and researcher with a background in tax law. If the IRS is seeking compensation for taxes your spouse acquired, Wendt recommends finding a good lawyer to discover if you are eligible for innocent spouse relief.