Injured vs. Innocent

The IRS has two programs to help spouses who are victims of debts they didn't create; Injured Spouse and Innocent Spouse. The Injured Spouse can help a spouse get their part of their refund back while the Innocent Spouse program helps a spouse who could be saddled with a tax debt of which they had not knowledge.

Injured Spouse Relief is the more commonly used of the two programs and is for times when a refund from a joint return could be taken for debts that  belong to only one of the spouses. Bob and Jan are filing a joint return and have a $2300 refund coming. The problem is that Jan owes on a back child support and the refund will be taken to put on that bill. Bob has 2 options. He can let the refund go on the debt or he can fill out a Form 8379 to get his part of the refund back. Form 8379 has the taxpayers allocate income and deductions to each spouse. The IRS then calculates the refund the injured spouse is due. To qualify, the Injured Spouse must not have a debt that the IRS will collect from a refund (currently back Federal taxes, child support and a default on a federally backed program like student, VA, or FHA loans). They also have to have some kind of income on the return and either withholding or refundable credits they are eligible to receive. One exception, if the couple resides in a community property state, the injured spouse doesn’t have to have income or withholding. Form 8379 can be filed with the tax return or submitted when the letter arrives announcing the setoff (a nice way to say we’re taking your money). Some states also have a form of injured spouse. Kansas, for example, will send out an allocation letter when they receive a return eligible for setoff. I wish they would allow the allocation to go in with the return, hint, hint. Another advantage of filing as injured spouse is the couple gets the benefit of filing a joint return. The other option for an injured spouse is to file as Married Filing Separate and that could mean the loss of credits and deductions that can be taken on a joint return. Filing form 8379 is a much better option.

Innocent Spouse Relief is in the news right now because Democratic Senators and Congressmen have asked IRS Commissioner Shulman to look at the 2 year rule for applying for Innocent Spouse Relief. This program can provide some protection for a spouse when a joint return was filed and they can show that had and could not have had knowledge of the tax problem. Basically, they had no control over taxes that year. After Bob and Jan file for divorce, Jan finds out that Bob cheated on their taxes. He had actually lost his job and spent the time she thought he was at work in a casino winning jackpots. He had their return prepared without his gambling winning. She actually didn’t see the return just the Form 8879 to sign. Once the IRS caught the missing W2Gs, Bob hide those notices from her too. The first she knew of the debt was after he left and she received an un-intercepted notice. Jan can file a form 8857 with a statement explaining why she should be considered for innocent spouse status. Timing is important on this. The taxpayer right now only has 2 years from the first collection notice to request innocent spouse status. Further complicating the timing is that the taxpayer and spouse must not have lived together for the year before the innocent spouse files Form 8857. And the couple must be divorced, legally separated or the non-innocent spouse has died. The biggest hurdle is the innocent spouse must prove that they had no clue that their spouse was filing a bad return or was intimidated into filing the return. If Jan knew that Bob was off work and they were living on his winnings, she is just as liable for the tax as he is.

As with any tax issue there is more to both the injured and innocent spouse programs If you think you might qualify, check with a tax professional.