No one anticipates when they get married, and utter the phrase “for better or worse,” that one day they will be subject to an Internal Revenue Service (IRS) criminal investigation for fraud perpetrated by their spouse without their knowledge. However, it can and does happen.
Most married couples file their tax returns using a “married filing jointly” status. Filing in this manner means both spouses are jointly and severally liable for any underpayment of tax. In other words, the IRS can turn to either spouse, individually or both spouses together, for payment of any deficiencies.
The general statute of limitations for the IRS to audit a return is three years, beginning on the later of the date the return was due or the date the return was filed. In those instances where fraud is involved, the statute of limitations is “tolled” for both spouses indefinitely, even if only one spouse is involved in the fraud. Therefore, an individual who may have had no knowledge of their spouse’s involvement in a fraud scheme may still find themselves being assessed with significant underpayments of taxes, interest and penalties years later and long after their tax records have been disposed of.
The IRS does provide a remedy in those situations where the fraud of one spouse results in the audit of a joint return. Under what are often termed the “innocent spouse” rules, the spouse not involved in the fraud can petition the IRS for relief from the underlying taxes, interest and penalties.
The innocent spouse rules fall into three categories: 1). traditional innocent spouse relief, 2). allocation of liabilities, and 3). equitable relief. The rules for each category of relief vary somewhat. Generally, however, relief may be available if it can be established the innocent spouse did not know, and had no reason to know, there was an understatement of tax and, when taking into account all the facts and circumstances, it would be unfair to hold the innocent spouse liable for the understatement of tax.
It is important for the taxpayers to make themselves aware of the various procedures and deadlines for applying for relief under the innocent spouse rules. Seeking competent legal counsel is an excellent first step. If you require assistance with these matters, or any other tax matters, please contact our firm.