Can I Separate My Tax Liability From My Former Spouse? Separation of Liability Relief

Separation of liability is a form of innocent spouse relief available to taxpayers facing a tax debt resulting from a spouse’s share of understated taxes from a joint return. This happens when one spouse doesn’t report all of their income or claims excessive income or deductions. Normally, both spouses are responsible for the tax due on their joint return, but the IRS offers exceptions for some situations.

If you want to separate your tax liability from that of a spouse or former spouse, pursuing this Internal Revenue Service (IRS) relief procedure may be a viable option. However, this type of relief is complex and has strict eligibility criteria. In this post, we at The W Tax Group examine how separation of liability works and the requirements for a successful application.

Separation of Liability Relief – An Overview

If you and your spouse file your taxes under the “married filing jointly” status, you are jointly and severally responsible for your tax bills. For example, if you have no funds to pay your tax debt, the IRS can collect the entire amount from your spouse and vice versa.

The end of a marriage does not retroactively dissolve your joint filing status for a return you filed while the marriage was in effect. If the marriage ends through divorce or legal separation, both filers remain individually responsible for paying the assessed tax, penalties, and interest. Similarly, if one of the filers passes away after filing the joint return, the surviving spouse is solely responsible for paying the tax debt.

But what happens if the IRS discovers unreported income through its document matching program or an audit? As far as you know, your return accurately reflects your income and allowable deductions, which means your co-filer must have understated the tax without you knowing about it. 

In this case, a separation of liability may be available. When the IRS grants a separation of liability, it divides the tax liability between two taxpayers who are married and filing jointly. In other words, each filer is only responsible for their share of the tax bill, which the IRS determines by their specific income levels and allowable deductions. 

Note: A separation of liability does not allow you to claim a refund for the tax you already paid. This remedy only relieves you from an additional tax liability due to your co-filer’s income and assets.

Eligibility Criteria

Separation of liability applies when one of the joint filers has underreported tax on a jointly filed return without the other’s knowledge. It can also apply when one spouse coerces or abuses the other spouse into signing the return. Consequently, the IRS deems it unfair to hold one filer liable for the understatement. 

However, the IRS has strict qualification requirements for this relief program. For example, suppose your co-filer’s financial situation ramps up your tax debt significantly. In that case, separating liability is not an easy solution to get some of the liability off your shoulders. Learn more about these eligibility criteria below. 

Married Filing Jointly Status

Joint filing status is a requirement for a separation of liability. The IRS specifically developed this relief for individuals who filed their taxes jointly and want to separate their tax liabilities due to errors one filer made on the joint return. However, this relief may also be available if you are married and filing separately in a community property state. 

Marital Status and Living Arrangements

The IRS will only grant a separation of liability if you and your co-filer’s marriage has ended through divorce, legal separation, or death. There is one exception. If you haven’t lived in the same dwelling for at least 12 months, you can still request separation of liability, even if you’re still legally married. However, you must be estranged from each other, and neither of you can be planning to move back in together.

Example: Taxpayers A and B are married and filing jointly. B, a service member, has been on a tour of duty for 13 months. If B has understated their tax, the IRS will not grant A a separation of liability as there is a reasonable expectation that B will return to the marital home. 

Understatement of Tax 

Separation of liability is only available to requesting spouses facing a higher tax bill due to a co-filer’s understatement of tax. In most cases, a higher assessment due to a tax understatement will follow an audit or detection by the IRS’s document matching program. 

Various return errors can constitute a tax understatement. For example, a filer can understate tax by neglecting to report income, inflating business deductions, or claiming unsubstantiated tax credits. If your co-filer completed the return correctly, a separation of liability is not available. 

No Knowledge of Tax Understatement

When requesting a separation of liability, you must demonstrate that you did not know that your co-filer understated tax. The IRS may assess whether you knew about the understatement by considering surrounding factors. 

Example: Taxpayer A, a contractor, received a substantial payment from Client C, who reported the expense to the IRS using Form 1099-NEC. However, A did not report the income on the joint return he filed with B, who was his wife at the time of filing. B, who had no insight into A’s business dealings, was unaware of the payment. 

In the above example, the IRS will likely accept that B did not know the income. However, suppose A used the unreported income to treat B to a luxury holiday. In that case, the IRS may conclude that B had “constructive knowledge” of the income, which can affect her ability to claim separation of liability relief.

Partial Separation of Liability

In the case of partial separation of liability, the IRS holds you responsible for the portion of the understatement you knew about. 

Example: Consider our previous section’s example of joint filers A and B. Suppose Client C paid A $30,000 in exchange for their services. When B asks where the money for the luxury holiday comes from, A tells her that his client paid him $10,000 in cash.

Later, when preparing their joint return, B notices that A did not include $10,000 as an income item. However, she does not insist that A include the amount because she mistakenly believes that the IRS will not detect the unreported cash payment. 

In this example, if the IRS grants a partial separation of liability, it can hold B responsible for the tax, penalties, and interest on the $10,000 she knew about. However, she will not be responsible for the tax on the remaining $20,000. 

Domestic Abuse

The presence of domestic abuse can mitigate the requirement that you should not have known of a tax understatement by your co-filer. In these cases, the IRS accepts that, while a requesting spouse knew about the understatement, they signed the joint return under duress. As a result, holding the requesting spouse responsible for their co-filer’s share of the understated tax is unfair. 

Applying for Separation of Liability Relief

Once the IRS assesses a higher tax debt against you due to an understatement by your co-filer, you will receive a notice with the amount you owe. This letter also provides the instructions you should follow to resolve the matter. In response to this tax bill, you can request a separation of liability by following the steps below: 

1. File Request for Innocent Spouse Relief

After receiving a notice of taxes you owe due to a return error, you have two years to request innocent spouse relief by filing Form 8857 (Request for Innocent Spouse Relief). This form also applies to requests for innocent spouse relief or equitable relief. However, you do not need to specify that you are requesting a separation of liability. The IRS will assess your situation and apply the appropriate type, provided that you are eligible. 

2. Review by the IRS

Once the IRS receives your request for separation of liability, it will contact your co-filer and ask them if they want to respond. The IRS can take up to six months to review this request. While you wait for your determination letter, staying current and compliant with your taxes is crucial.

3. Letter of Determination and Appeal

After reviewing your request, the IRS will send you a determination letter indicating whether it grants or denies the separation of liability. If the IRS grants the request, you no longer need to pay your co-filer’s share of the tax balance resulting from their understatement. 

However, if the IRS denies your request, you have 30 days from the date of the determination letter to file an appeal. 

Note: If the IRS grants your request, your co-filer also has the right to appeal the decision. Contact us at The W Tax Group for advice and representation during the appeals process. 

Challenges and Pitfalls

When requesting a separation of liability, you may face several pitfalls. The IRS typically declines these requests if:

• You signed an offer in compromise as a tax debt settlement
• You signed an agreement with the IRS that covers the higher liability due to the tax understatement
• A court denied you relief
• You did not request relief during a related court proceeding

The transfer of assets between joint filers is another potential pitfall that can impact the outcome of a separation of liability request:

• Evidence of fraudulent intent: Asset transfers can indicate an attempt to evade taxes, suggesting fraudulent behavior.
• Disqualification from relief: If asset transfers are part of a tax evasion scheme, the IRS may deny a separation of liability relief request.
• Joint complicity implication: Transfers can imply that both spouses were complicit in evading taxes, undermining one spouse’s innocence claims.
• Impacts allocation of liability: Transfers can complicate how the IRS allocates tax liability, especially if filers moved assets to shield them from taxes.

If an asset transfer occurred between you and your co-filer, schedule a consultation with us, and we will assist you with your separation of liability request. 

Impact of Separation of Liability Relief

The most direct impact of a separation of liability is the reduction in tax debt. The IRS effectively divides the tax debt between the two joint filers based on factors such as who earned the taxable income and who was responsible for errors on the joint tax return. As a result, you are only responsible for the portion of the debt that is reasonably attributable to you rather than the entire joint liability.

Upon granting relief, the IRS will cease collection activities against you for the portion of tax debt from which it relieved you. As a result, you will not face wage garnishments, bank levies, or other collection measures for that portion of the debt.

Separation of liability relief can also lead to the adjustment of past liabilities, meaning it can affect tax liabilities from previous years as long as you meet the conditions for relief for those years.

Finally, this relief provides legal and financial independence from a spouse’s or ex-spouse’s tax errors or fraud, which can be crucial during or following a divorce. 

Frequently Asked Questions

What happens if both spouses qualify for separation of liability?

If both filers independently qualify for separation of liability, the IRS may split the tax liability according to each spouse’s involvement and financial contributions. Each spouse would then only be responsible for the portion of the tax debt that corresponds to their specific circumstances and errors.

Can separation of liability relief be revoked?

Once granted, the IRS generally does not revoke separation of liability relief. However, if the request was based on fraudulent information or the IRS discovers a critical misunderstanding after granting the relief, the IRS might reconsider the decision. Providing accurate and truthful information when applying for any tax relief is crucial.

Does applying for separation of liability affect my credit score?

Applying for separation of liability itself does not affect your credit score. However, unresolved tax liabilities and any resulting collection actions by the IRS, such as tax liens, can negatively impact your credit score. Successfully obtaining relief might help avoid such impacts.

Are non-U.S. citizens eligible for separation of liability relief?

Non-U.S. citizens who file joint tax returns are eligible for separation of liability relief under the same conditions as U.S. citizens. The key factors are filing status and the nature of the tax understatement, not the applicant’s citizenship status.

Take Control of Your Tax Situation: Contact The W Tax Group

Getting separation of liability can be complicated. You must make a compelling argument to the IRS, or they will not approve your request.

If you’re considering applying for separation of liability relief, don’t go through the process alone. At The W Tax Group, we specialize in IRS relief programs and can provide the expertise and support you need. Our team is ready to help assess your situation, guide you through the application process, and represent you in dealings with the IRS. Schedule a consultation with us today to take the first step towards resolving your tax issues.