IRS Innocent Spouse Equitable Relief 

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You will only be able to qualify for IRS innocent spouse equitable relief if you do not qualify for the 2 previously discussed types of relief, innocent spouse relief or relief by separation of liability.

If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If the IRS determines that you do not qualify for the first two types of relief, then they will consider whether you would qualify for equitable relief.

Under Innocent spouse relief and relief from separation of liability, you can only get relief from an understatement of tax but not an underpayment. With equitable relief, you are eligible for relief from both an underpayment and understatement of tax. An underpayment of tax is the difference between the amount of tax due shown on your return and the amount that you paid with the return. For example, if you filed a joint return in 2009 that showed $10,000 owing. If you paid $7,000 with the return, you would have an underpayment of $3,000.

An understatement of tax is the difference between the correct amount of tax that should have been shown on your return and the amount of tax that you actually showed on your return. For example, if you filed a joint return that showed a tax owing of $10,000, but the correct amount should have been $12,000 due to an omission of income, you would have an understatement of $2,000.

In order to qualify for equitable relief you need to meet all of the following criteria.

1. You do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law.

2. You and your spouse did not transfer assets to one another for the purpose of defrauding the IRS or a third party such as a creditor, ex-spouse, or business partner.

3. Your spouse did not give property to you wih the intention of avoiding tax the payment of tax.

4. You did not file or not file your return for the purpose of commiting fraud.

5. The tax was not paid except for situations where you are entitled to a refund, discussed later.

6. You are able to show that it would not be fair for you to be held liable for the understatement or underpayment of tax.

7. The tax amount owing that you are requesting relief from has to be from an item of your spouse that you filed the joint return with, except for the following situations:

a. The item is attributable or partly attributable to you only because of community property law. If you qualify for this exception, the IRS will consider that item to be attributable to your spouse in their consideration of equitable relief.

b. If you hold title to the item, there is a presumption that item is attributable to you. You can argue against this presumption based on the facts and circumstances.

c. You did not know, and had no reason to know that the money meant for the payment of tax was misused by your spouse (or former spouse) for his or her self. If this exception is met, the IRS may consider allowing equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were misused by your spouse.

d. You are able to show that your spouse abused you before signing the return, and that, because of that abuse, you did not object to any part of the return out of fear of your spouse's continuing the abuse. If you qualify for exception, the IRS may grant relief.

IRS Tax Refunds

In the following 2 situations, you can be eligible to receive a tax refund of certain payments you have made.

Understatement of tax. If the IRS grants you relief for an understatement of tax, you will be eligible for a refund of your tax payments made under an IRS installment agreement, but only if you have not defaulted on the installment agreement. You will not be considered in default if the IRS did not issue a defaulted installment agreement notice or take any action to end the agreement. However, only installment agreement payments made after you filed the Form 8857 would be eligible for a refund. Also, you will have to show that you were the source of the funds that you want refunded to you.

Underpayment of tax. If the IRS allows relief for an underpayment of tax, you will qualify for a refund of payments that you made after July 22, 1998, if you show that you were the source of the funds used to make the payments that you would like refunded. Payments made with the joint return, joint payments or payments by your spouse do not qualify for a refund.

Limit on amount of refund. If your request for relief is within 3 years after you file your return, your refund will not be more than the amount of the tax paid within the 3 years (including an extension of time to file your return) before you filed your request for relief.

If you filed your request for relief after the 3-year period, but within 2 years from the time you paid the tax, the refund will not be more than the tax you paid within the 2 years before you filed your request for relief.

Factors the IRS will consider in Determining Whether To Grant Equitable Relief

The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax. The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. The IRS will consider all factors and weigh them appropriately.

The following are examples of factors that may be relevant to whether the IRS will grant equitable relief.

· Whether you are separated, legally or not or divorced from your spouse. A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, would not be considered separation. To not be considered a temporary absence it would have to be reasonable to assume that the spouse will not return to the household.

· Whether or not it would be a hardship if equitable relief is not given. A hardship would be one in which you were not able to pay your basicliving expenses.

· Whether or not a divorce decree or agreement obligates you to pay the tax. However if you knew or had reason to know that your spouse would not pay the tax, this factor would not be considered in your favor.

· If you received a significant benefit from the unpaid tax or item causing the understatement of tax, the decision to grant relief may not go in your favor. A significant benefit would be benefit beyond normal living expenses.

· Whether or not a good faith effort was made to comply with federal income tax laws for the tax year for which you are requesting relief or the following years.

. In the situation where there is an underpayment of tax, the IRS will determine if you did not know and had no reason to know that your spouse would not pay the income tax liability.

In the situation where there is a tax liability that originated from an understatement of tax, the IRS will determine whether you did not know and had no reason to know of the item that caused the understatement. If you had reason to know of the item that caused the understatement, this will not be given more weight than any of the other factors. However, if you actually knew of the item that caused the understatement, this would weigh more heavily against relief than the other factors. This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling.

In deciding if you had reason to know, the IRS will look at your level of education, any deceit or evasiveness of your spouse, how much you were involved in the activity that generated the tax liability, how much you were involved in the household and business finances, your business and financial knowledge and if you made any large or unusual expenditures compared with prior spending.

Example.

You filed a 2006 joint return with your spouse. That return showed a tax liability of $12,000. You contributed $6,000 of your own money and got a loan to pay the other $6,000. You gave 2 checks for $6,000 each to your spouse to pay the $12,000 taxliability. Unknown to you, your spouse took the $6,000 loan moneyspent it on himself. You and your spouse were divorced in 2007. You are able to show that you had no knowledge or reason to know that when you signed the return that the tax would not be paid. These facts would indicate to the IRS that it would not befair to hold you liable for the $6,000 underpayment. The IRS will consider of the facts and circumstances, to determine whether to grant you equitable relief from the $6,000 underpayment.

Some additional facts that could weigh in favor of equitable relief, but will not weigh against equitable relief would be.

· Whether your spouse abused you.

· Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief.