What is the innocent spouse rule?

For married couples, often one spouse is self-employed and doesn’t pay their taxes and the other spouse has no idea about back taxes. What the IRS doesn’t tell you is that only the self-employed spouse may be responsible for the taxes.

This is the basic situation that I have encountered very often in my practice. I’m meeting with a couple who are behind on their taxes to the Internal Revenue Service. One of the spouses (assuming the man) is self-employed and does not pay his taxes. The other spouse (wife) has a regular W2 job and taxes are withheld from their paycheck. However, the IRS is after not only her husband for back taxes, but her as well.

This may be a classic situation where the wife may qualify for a Determination of Innocent Spouse, which means she will not be liable for taxes. More importantly, the IRS cannot tax or levy your bank accounts or assets to satisfy the tax debt.

To qualify for a Determination of Innocent Spouse, a person must adequately demonstrate to tax authorities that they had no control over the preparation of the tax return. For example, in our situation, the man (whom we’ll call John) is the sole owner of his business and has the authority to sign checks. John chooses the accountant and is the only one to meet the accountant.

John is the person who provides all the banking information and other tax deductions to the accountant. John is also the person who answers all the questions the accountant has regarding tax preparation. Ultimately, John is the person who collects the completed tax return and pays the accountant.

The wife (Jane) had no control or input over the tax preparation process. In addition, Jane has no control over her husband’s business, and taxes owed to the IRS can be directly attributed to John’s self-employment income. Under this scenario, Jane would be considered an Innocent Spouse by the IRS and would not be liable for back taxes.

When trying to settle back taxes with the IRS for a married couple, the Innocent Spouse Determination is a very powerful tool to use on a married couple. However, determining if a spouse qualifies can be time consuming, and it can take more than a year for the IRS to rule on a person’s application. Therefore, it is very important that a person seek professional assistance from an experienced tax professional.