The difference between an innocent spouse and an injured spouse can be confusing for taxpayers. A simple way to think of the difference is this: most times the innocent spouse is no longer married and the injured spouse is married.
When you file a joint income tax return, the law holds you and your spouse jointly and separately responsible for the entire tax liability. What this means is that the IRS may collect the tax due from the both of you – or from either one of you. This is true even if you later separate or get a divorce and it’s true even if your divorce decree says that your ex is responsible for the outstanding debt.
Typically, you remain liable for the tax unless you can prove that you didn’t know or had no reason to know about the liability. That might be case because of unreported income (income received by your spouse or former spouse that was not reported) or an incorrect tax deduction, credit, or basis claimed by your spouse or former spouse.
Here’s an example. You filed a joint return with your spouse and later receive a letter from the IRS indicating that $5,000 in income was not reported. You find out that it was money your ex earned during the marriage that he failed to report – and you didn’t know a thing about it.
You would seek innocent spouse relief from the IRS when you become aware of the tax liability and you believe that it is not yours (meaning that it belongs only to your spouse or former spouse). In most cases, innocent spouse relief is limited to taxpayers who are no longer married.
If you were legally married at the time the outstanding tax liability was assessed, it means that your tax refund is fair game as far as the IRS is concerned – they’re trying to collect on the debt. If that’s the case, and you did not have reason to know about the debt, you may be able to apply for relief using federal form 8857, Request for Innocent Spouse Relief. The statute of limitations for making a claim for relief is typically two years after the date on which the IRS first attempted to collect the tax from you (some exceptions apply).
Be aware that any claim for innocent spouse relief requires the IRS to reach out to your former spouse – even in cases of domestic abuse. However, the IRS will not reveal personal information, such as an address, to the former spouse.
In contrast, injured spouse relief applies to taxpayers who are married. You are an injured spouse if your share of your tax refund as shown on your joint return was, or is expected to be, applied against your spouse’s past-due federal debts (including student loans), state taxes, or child or spousal support payments. It typically happens when, after a joint return is filed, the tax ID number of the person responsible for the tax liability triggers an offset of the entire refund.
Here’s an example. Let’s say you marry or are married to someone who owes outstanding child support payments. You file a joint return. You expect a refund but the IRS matches the tax ID number of your spouse to the outstanding debt and gives the ex the entire refund – including the part you thought should be yours.
If you are entitled to injured spouse relief, you may be able to get your share of the refund released to you. Your share is determined by a formula: it’s not necessarily a 50/50 split. An allocation is made as if you and your spouse each filed a separate tax return instead of a joint tax return. That means each of you must allocate your own wages, self-employment income and expenses (and self-employment tax), and credits such as education credits to the extent possible on separate forms. Items that are commingled, such as interest earned in a joint bank account, would be divided equally. The IRS uses the allocation to determine which portion of the refund, if any, would be due to an injured spouse.
Caveat: if you live in a community property state, the rules are different. In community property states, overpayments or refunds, are considered joint property and are generally applied (offset) to legally owed past-due obligations of either spouse. However, there are exceptions. The IRS will use each state’s rules to determine the amount, if any, that would be refundable to the injured spouse. For Texans, in simple terms, this means the liable spouse pays all of his overpayment and the injured spouse pays half of the overpayment to the outstanding debt. In a recent situation roughly 75% of a client’s refund went to back child support of the liable spouse. The non-liable spouse received about 25%.