My husband failed to include income from his side business in our income tax return. Will the IRS hold me responsible for the tax deficiency?
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As a general rule, spouses that file a joint income tax return must ensure that the tax return is accurate and if there is a tax deficiency, both spouses are responsible for paying it. In certain situations, the IRS will release one spouse from liability to pay the tax deficiency.
Release from having to pay tax deficiencies caused by one’s spouse is called “innocent spouse relief” and it is granted in exceptional circumstances. Innocent spouse relief is rarely granted. Taxpayers should have valid reasons for trying to obtain relief.
Spouses seeking innocent spouse relief must prove to the IRS that s/he did not know and had no reason to believe that the spouse who prepared the return failed to include additional sources of income. By signing the income tax return, each spouse attests to the validity of the return. Where the wife claims that she did not know that her husband failed to include income, the IRS will look at various factors to determine whether the wife truly had no reason to believe that her husband would fail to include income.
(1) The IRS will examine the level of the spouse’s involvement in household financial matters to evaluate whether the spouse could have or should have known that the income tax return filed on her behalf was inaccurate.
(2) Another factor that plays an important role is the spouse’s level of education and ability to understand financial issues. Those with at least a college degree will be held to a higher standard with regards to understanding taxpayer obligations when filing income tax returns.
(3) If the spouse seeking relief is employed, the IRS will also look to the type of job the spouse has and whether the skills involved in the job give the spouse the capability to understand financial issues. For example, if the wife controls the checkbook and has access to bank statements, that factor will weigh against the wife seeking relief. If the wife was involved in the business activity that generated the income, whether through managing finances or day-to-day operations, that will also negatively impact her ability to obtain innocent spouse relief.
(4) Even if a wife truly did not know that her husband failed to include income, the IRS can still argue that given her education and familiarity with household finances, she had enough knowledge to question the accuracy of the income tax return prior to signing it. It is rare for a wife not to have some type of involvement in the household’s finances and IRS will also look at prior behavior and spending patterns to determine how savvy the spouse is when it comes to financial issues. For example, if the wife has numerous credit accounts in her own name or owns her own business, these factors will cause the IRS to deny innocent spouse relief.
It is quite common that husbands prepare income tax returns and wives fail to understand what income is included or the amount of tax is declared on a tax return. It is not enough to simply say that a spouse failed to investigate any questionable items on the return.
If you feel that you may be able to qualify for innocent spouse relief, consider consulting a tax attorney who can further evaluate your situation and advise you on whether you can successfully apply for innocent spouse relief.