What is IRS Injured Spouse Relief?

So, what happens is the IRS may apply one spouse’s share of the refund to the other spouse’s non-joint debt, and if this happens, then the non-debtor spouse may seek to recover that share of the refund that was offset; this is what’s called injured spouse relief. Typically, the injured spouse would complete Form 8379, and they have an option to file it with their tax return.

 

What is IRS Injured Spouse Relief?

You don’t have to wait for the refund that you’re claiming on the tax return to be offset. If you know, for example, that your spouse has pastdue child support, what Susan is saying is you can file that Form 8379 preemptively with your tax return. The form divides out the share of the items on the return. It shows your client’s share of the refund, and so you would be telling the IRS, “If you’re going to offset this, don’t offset my client’s share of it.”

 

Claiming Refund for Injured Spouse

When you’re dealing with this type of offset situation, which is allowed by Internal Revenue Code section 6402, you have to figure out where is that offset debt, why is there a debt, and where did the offset go. So, if the IRS offsets the refund to pay an income tax, the IRS will issue this notice of offset to the taxpayer.

 

What is Injured Spouse Relief?

And if the offset is to pay non-tax debts, then the offset notice will come from the Bureau of Fiscal Services. So, it’s important to discuss with your client whether they received a notice from the IRS, whether they received a notice from the Bureau of Fiscal Services; and that will be your path to determining a number of things that flow from the injured spouse determination.

 

Debtor vs Non-debtor spouse, Injured Spouse Relief

Where there is a joint return and the reason for the offset was to pay a nontax debt, federal regulations do require the IRS to pay back the money that the non-debtor spouse can show was his or her share of the refund. And again, you would use that Form 8379, which shows you how to allocate the income, how to allocate the credits, and so on. Where the joint refund was used to pay a tax liability, the revenue procedures make clear that a portion of the refund may be attributable to the non-debtor spouse. This is because the husband and the wife who file a joint return do not have a joint interest in the overpayment. Each one has a separate interest, and consequently, the IRS can’t offset the entire amount of a joint refund to pay the separate tax debt of the other spouse.

 

Injured Spouse in Community Property States

There is complexity if the taxpayers resided in community property states because different states have different rules about what property can be used to pay the debtor spouse’s debt. There’s a cited IRM there, that first one. It contains references to various revenue rulings that describe how the allocation is carried out for specific states, so that’s very helpful. There’s also complexity where the joint return claimed the Earned Income Tax Credit and that second cite there to the IRM explains how that computation is made. And then we do have a few practice tips for you.

 

What is IRS Form 8379?

When you’re looking at Form 8379, question 11 says “Check this box only if you want your refund issued in both names. Otherwise, separate refunds will be issued for each spouse,” and then question 12 says “Do you want any injured spouse refund mailed to an address different from the one on your joint return? If ‘yes,’ enter the address.” So, the default settings are that each spouse will get his or her own refund check, and you may be in a situation where that’s a really good option to have. Because if the separate check goes to a mailbox that the other spouse has access to and the other spouse cashes the check, then the IRS will not intervene. It will apply the Family Disputes provision in the IRM, which just requires that the matter will have to be handled through the civil court system. So, if you think there’s a question of the debtor spouse intercepting this check, you may want to have the

 

Taxpayer Advocate Service

I think most people in the room are familiar with the Taxpayer Advocate Service. You may not know that our office is established by statute. It’s section 7803 of the Internal Revenue Code, and we actually have two statutory missions. One is to assist taxpayers who are having problems with the IRS, which is the same mission you have, but our other mission is to identify problems that affect groups of taxpayers and systemic problems, and we refer to this as our “systemic advocacy” function. The statute also requires the National Taxpayer Advocate, who is Nina Olson, to report to Congress twice each year, once on June 30th and then again on December 31st . And that December 31st report is required to include a summary of at least 20 of the most serious problems encountered by taxpayers.

 

Future of innocent spouse relief

So, Nina Olson has been a very effective advocate in reporting to Congress on the problems taxpayers face when they seek innocent spouse relief, and she was a main advocate for removing that two-year rule that we talked about that used to exist for relief under section 6015(f). It’s still there for (b) and (c), but it’s no longer there for section 6015(f). And this revenue procedure, which is a big improvement over previous guidance, the Taxpayer Advocate Service was instrumental in helping to develop that and advocating for better recognition, for example, of the role that domestic abuse can play in cases where taxpayers need either innocent spouse relief or injured spouse relief

 

Property Transfers Between Spouses

Are there are any special rules that apply to the taxation of property transfers between spouses?

There are special tax rules that apply to such property transfers depending on whether the transfer is between two spouses that are currently married or whether a transfer occurs between two spouses or former spouses incident to a divorce proceeding. If these spousal property transfer rules are not followed, there could be major tax problems down the road for both spouses.

 

No gain or loss will be recognized on any transfer of property between two spouses

The general rule is that no gain or loss will be recognized on any transfer of property between two spouses at any time during their marriage. This rule also applies when one spouse transfers property in trust for the benefit of the other spouse. This rule is not elective, meaning that it applies automatically. Likewise, the Tax Code imposes no gift tax on such transfers.

 

No Gain or Loss Between Spouses

In addition, there is a special tax rule that provides that no gain or loss is recognized when an individual transfers property to a spouse or former spouse incident to a divorce. This rule is meant to apply to property settlements incident to divorce and is also not elective. This rule applies regardless of whether the transfer of property is for the relinquishment of marital rights or the cancellation of indebtedness; it also applies regardless of whether the property transferred was owned separately or together during the marriage. An exception to this rule applies to treat a transfer of property in trust for a former spouse as a sale to the extent that the liabilities on the property exceed its basis.

 

Spousal Property Transfers in Divorce

Even though this rule provides that property transfers incident to divorce are not taxable, any payment that falls under the category of alimony is always taxable to the recipient spouse and always deductible to the spouse making the payment. Because of this rule making alimony taxable, it is important to make sure that property transfers that are really part of property settlement involved in a divorce do not have any of the characteristics that would make the IRS treat them as alimony.

Child Support and Alimony Payments in Divorce

Child support payments represent the parent’s obligation to assist in the support of his or her children. Thus, such payments are not deductible to the parent making the payment and do not result in gross income for the recipient. On the other hand, alimony payments are fully deductible to the spouse making such payments and result in gross income for the recipient. Therefore, the distinction between alimony payments and child support payments is significant. Misclassifying alimony or support payments can have drastic tax consequences.

 

What are Alimony Requirements in Divorce?

There are several requirements that must be met before a payment is treated as alimony for tax purposes. These requirements apply regardless of the couple’s characterization of the payment. One such requirement is that the payment must not be child support.

 

What Payment is Considered Alimony?

A payment will be considered child support for tax purposes if any of the following tests are met:

  • The payment is designated as child support in the divorce or separation agreement.
  • The payment is reduced on the happening of a contingency related to the child, such as attaining a specific age, leaving school, or leaving the spouse’s household.
  • The payment is reduced at a time that can be clearly associated with the happening of a contingency related to the child. (For example, payments that are reduced within six months of a child turning age 18, 21, or the local age of majority, are presumably child support.)

 

In addition, to qualify as alimony, all of the following factors must be in place:

  •  The payment must be in cash;
  • The payment must be received by or on behalf of a spouse under a divorce or separation instrument;
  • The instrument does not designate the payment as not deductible by the payor and not includible in the payee’s gross income;
  • The parties are not members of the same household if legally separated or divorced; and
  • There is no liability to make payments after the death of the payee.

 

What Factors does IRS Consider in Alimony?

In all instances, the substance of the payment type controls over its form, regardless of the characterization by the divorcing couple.

Married Individuals Living Apart Treated as Unmarried

A married individual who isn’t legally separated but who files a separate return, maintains a household for his or her dependent child, furnishes more than half the cost of maintaining that household, and whose spouse isn’t a member of the household during the last six months of the tax year is treated as an unmarried individual, for purposes of those Code Secs. that refer to this rule. So, a taxpayer who qualifies as unmarried under this rule generally can, for example, file as head of household.

 

Abandoned Spouse Rule

The rule is sometimes called the “abandoned spouse” rule. However, “abandoned spouse” isn’t always an appropriate description. The above requirements for treatment as an unmarried individual can be satisfied where a husband and wife separate by mutual consent. Moreover, it’s possible for both spouses to qualify as unmarried under this rule in the same year.

 

What is Considered an Abandoned Spouse for IRS Purposes?

An individual who’s married isn’t considered married, for purposes of those Code Sections that refer to these Code Sec. 7703(b) rules if the individual meets the following requirements:

(1) The individual files a separate return

(2) The individual maintains as his or her home a household, which, for more than half the tax year, is the principal place of abode of a child for whom the individual is entitled to a dependency deduction, or would have been so entitled but for the release of the exemption by the custodial parent to the noncustodial parent or the allocation of the exemption to the noncustodial parent under a pre-’85 qualified instrument,

(3) The individual furnishes more than one-half the cost of maintaining the household during the tax year

(4) During the last six months of the tax year, the individual’s spouse isn’t a member of the household

 

Qualifying as Unmarried

To qualify as unmarried, a married individual must file a separate return. The Tax Court has ruled that this requirement was met where the individual filed no return at all. In that case, the court said that it was particularly compelled to reach its conclusion because of the fact that taxpayer’s filing a Tax Court petition precluded her from filing a joint return.

A married individual who isn’t legally separated is treated as unmarried if he files a separate return and his spouse isn’t a member of the household during the last six months of the tax year.

 

Married Individual with Different Houses

A married individual isn’t treated as unmarried if the individual’s spouse occupies the same residence, even if they maintain separate bedrooms and bathrooms, or if the spouse moves into the basement while taxpayer and his children reside in the upper levels. There is a need for a “bright line” test that doesn’t depend on a factual inquiry into the intimate living details of an estranged couple. Therefore, a court won’t explore the quality of a marriage or membership in a household when a husband and wife live together under one roof and adopt some form of “constructive absence” under the circumstances.  Congress didn’t intend spouses living under the same roof to be treated as living “separated and apart.”

 

 

Divorce for Tax Purposes

Is it legal to get a divorce for tax purposes?

MFS drops them into the single tax brackets and limits the types of credits they can take.

What his wife is seeing is that as two single people, he can claim Head of Household and the child, and itemize all the deductions to minimize his tax liability, and then she files single with standard deductions. It would usually be better tax wise to have the higher earner claim the itemized deductions and child exclusions in the HOH brackets, but they may have some specifics (Retirement contributions, EIC earnings, etc). There are also a host of tax changes in 2013 and 2014 that are not beneficial to married couples – check out this article on Forbes for some points.

 

Tax Issues Caused by Getting Divorce

While not strictly illegal, there are issues that can be caused by this.

1) Divorce and remarriage. If you obtain a divorce for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years.

2) Head of Household. You must have paid more than half the cost of keeping up a home for the year, and have a qualifying dependent. This is why the higher earner usually claims the child and HOH status.

3) Qualifying Dependent. You must have paid more than half the living expenses for your qualifying dependent. This is why the higher earner usually claims the child and HOH status.

4) Benefits. As you said originally, you had to get legally married to get onto her benefit plan. This would still be an issue.

5) Asset transfers. If one of you were to pass while not married, any assets transfered to the remaining person would be subject to probate and estate taxes. Also, any disaproving family members may file claims in probate to capture the assets since they would have a better claim than your ex-spouse.

Divorce and Tax Debt

Requesting IRS Installment Agreement

You can request an Installment Agreement (IA) for 2012 and 2013.

Our term for your set of circumstances is called a Front-End Mirror Assessment: the Service will modify your account and your ex-spouse’s account so you both show the full balance due for both tax years (mirrored). Payments you make and credits (like future refunds) that land on your account will be mirrored on her account. Payments and credits to her mirrored side will land on yours. The balance due is 100% yours and 100% hers; it is not split 50/50.

 

Divorced Spouses with Bad Tax Returns

The mirroring allows payment plans on both sides. If one of the two divorced spouses is not compliant with past tax returns, the Service can move forward with enforced collections (bank levies, wage levies, and Federal Tax Liens) on that spouse, while the other is protected by the terms of the Installment Agreement.

 

Divorce and Tax Debt

The rep at the Taxpayer Assistance Center (TAC) probably set the Very Slow Moving Wheels in motion, and hopefully followed all the procedures necessary to protect you from the actions described on the notice. They should have explained this process can take 90 days.

 

Notice CP504

If the notice was a CP 504 (identified in the upper-right corner) for 2013, I suggest you visit the TAC again ASAP and request a notice hold on the 2013 tax year until the mirror process is completed. The hold, per our manual, is supposed to be for 15 weeks.

 

Notice CP523

If the notice was a CP 523 saying your agreement is in default because of the new balance due, visit the TAC and ask if the appropriate Pending IA transaction was input on the 2013 tax period. You could also call the toll free number on the notice: 1-800-829-0922, or 1-800-829-8374 M – F 7am – 7pm and ask the same questions. The representative will ask some verification questions, research your account, and provide an update if possible.

Child Adoption Qualifying child of more than one person

Draft Form 1040 instructions. Page 16 has a chart for qualifying a person as a dependent, and the rules run through page 19, including this:

 

Qualifying child of more than one person.

Even if a child meets the conditions to be the qualifying child of more than one person, only one person can claim the child as a qualifying child for all of the following tax benefits, unless the special rule for Children of divorced or separated parents, described earlier, applies.

  1. Dependency exemption (line 6c).
  2. Child tax credits (lines 52 and 67).
  3. Head of household filing status (line 4).
  4. Credit for child and dependent care expenses (line 49).
  5. Exclusion for dependent care benefits (Form 2441, Part III).
  6. Earned income credit (lines 66a and 66b).

 

Child Adoption Qualifying child of more than one person

No other person can take any of the six tax benefits just listed unless he or she has a different qualifying child. If you and any other person can claim the child as a qualifying child, the following rules apply.

If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent.

Information and Applying for Innocent Spouse Relief

Innocent Spouse Relief (Including separation of liability and equitable relief)

Many married taxpayers choose to file a joint income tax return because of certain benefits this filing status  provides the taxpayer. However, by filing a joint return, both taxpayers are jointly and severally liable for such taxes and any tax, interest or additional penalties resulting from the joint return, even if you later divorce. This could present problems when taxpayers are not totally up front with each other. Luckily, innocent spouse relief is available to taxpayers. Innocent spouse relief will be essential when one spouse does not know about all the activities of another taxpayer that they are filing a tax return with.

 

Information and Applying for Innocent Spouse Relief

The joint and several liability means that each taxpayer is legally responsible for all taxes owed. Therefore, both spouses usually are held responsible for all tax due even if one spouse earned all the income or improperly claimed deductions or credits. This is also true even if the divorce decree states that a former spouse will be responsible for the entire amount due on previously filed joint returns. In some cases, however, a spouse can get relief from this joint and several liability by going through the innocent spouse relief process.

 

Currently, there are three types of relief from joint and several liability for spouses who filed joint returns:

  1. Innocent Spouse Relief provides relief in situations that have assessed additional taxes if your spouse or former spouse stated income, stated incorrectly or improperly claimed deductions or credits.
  2. Relief by Separation of Liability If owed ​​additional taxes prorated between you and your former spouse or current spouse from whom you are separated, because any departure was not properly declared in the joint statement. The amount of taxes that is assigned to you is the amount which you are responsible.
  3. Equitable Relief may apply if you do not qualify for innocent spouse relief or separation of liability due to any item incorrectly stated in the joint tax return and is generally attributable to your spouse. You may also qualify for equitable relief if declared correct amount of tax on the joint return, but tax the return was not filed.

Note: You must request relief innocent spouse relief or separation of liability no later than 2 years after the date on which the IRS first attempted to collect the taxes owed . For equitable relief, you have to apply for relief during the time the IRS has to charge you the tax.

 

Tax Refunds and Innocent Spouse Relief

If you wish to request a refund of the tax you paid, then your request must be made ​​within the period of time that is given to you to claim a refund, which is generally three years after the date on which the statement is submitted to two years after payment of the tax, whichever is later. To see additional restrictions on redemptions available under the innocent spouse relief, equitable relief, and based on the laws of community property relief, see Publication 971, Innocent Spouse Relief (Innocent Spouse Relief). No refunds are available on relief by separation of liability that happens due to claiming innocent spouse relief.

 

You must meet all the following conditions to qualify innocent spouse relief:

  • Taxpayer filed a joint return where an understatement of tax (deficiency), which is attributed only to erroneous items indicated by your spouse. A “wrong item” includes income received by your spouse, but was omitted from the joint return. Deductions, credits and property bases are also considered as erroneous items if they are incorrectly presented in the joint statement.
  • You demonstrates that when signing the joint tax return you did not know and had no reason to know, that there was an understatement of tax; and
  • Taking into account all the facts and circumstances, it would be unfair to consider you responsible for the understatement of tax.

 

To qualify for the ” relief by separation of liability “ , must have filed a joint return and meet one of the following requirements when applying for relief:

  • Are divorced or legally separated from the spouse with whom filed a joint return,
  • Taxpayer is a widower or
  • It has not been in any member of the household of the spouse with whom you filed the joint return for the 12 month period ended on the date of the time Form 8857 Application for Innocent Spouse Relief was filed.

If at the time you signed the joint return and had actual knowledge of what caused the error on a joint return, you are not entitled to relief by separation of liability.

 

Publication 971 , Innocent Spouse Relief

If you do not qualify for “innocent spouse relief” or the “relief by separation of liability,” you may qualify for the “equitable relief” . To qualify for this relief, must show that, taking into account all the facts and circumstances, it would be unfair to hold him responsible for the understatement or underpayment of taxes. Also, must meet other requirements explained in Publication 971 , Innocent Spouse Relief.

 

Requesting Innocent Spouse Relief

To request innocent spouse relief, relief by separation of liability or equitable relief, must submit to the IRS on  Form 8857. If you want relief from joint and several liability, the IRS is required to notify the spouse who filed the joint statement on your application and allow you to provide information to consider about your claim.

If you lived in a state with laws of community property and did not submit a statement as “married filing jointly”, you may still qualify for relief. The states with the laws of community property are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. See Publication 971, in English, for additional information. Do not confuse the relief of joint and several liability to the claim of the injured spouse relief. A taxpayer is considered an “injured spouse” if filing a joint return and all or part of your share of the refund was, or will be, applied to federal or state taxes owed, outstanding pension for minor children, not tax federal debt (as a student loan) owed ​​by the spouse who filed the joint return.

 

IRS Tax Information for Innocent Spouses

Report a Name Change before Filing Taxes

People will change their names for many reasons. It is absolutely essential that you tell the Social Security Administration (SSA) before filing your tax return with the IRS. Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

 

Report a Name Change before Filing Taxes

This is important because the name on your tax return must match SSA records. Otherwise, you may receive a letter from the IRS about the discrepancy. And if you expect a refund, this may delay it.

 

Be sure to contact SSA is:

  • You got married or divorced and changed its name.
  • A dependent who you claim had a name change. For example, this would apply if you adopted a child and the child’s surname changed.

File Form SS-5, Application for a Social Security card with the SSA to let them know about a name change. You can get the form at SSA.gov / Spanish by calling 800-772-1213 or at an office of the SSA.

You can file the SS-5 form to a SP-SSA office or by mail. Your new card will have the same Social Security number (SSN) as before but will show your new name.

 

Name Change for Dependent

Notify the SSA if your dependent renamed. For example, this can happen if adopted a / a child / the child’s surname / a change. If you adopted a / a child / a does not have a social security number, you can use an Id Adoption Taxpayer (ATIN) on their tax return. A ATIN is a temporary number. If you have a foster child who has no SSN, use a taxpayer identification number of temporary adoption ( Adoption Taxpayer Identification Number , or ATIN) on your tax form. You can request an ATIN presenting the IRS Form W-7A  request taxpayer identification number for U.S. adoptions pending. Get the form at IRS.gov or by calling 800-829-3676.

 

Reporting Changes in Circumstances in 2015

If you purchased coverage through Market Health Insurance you may receive advance payments of the tax credit premium in 2015. If so, be sure to report back to the market throughout the year any change in circumstances, such as renaming, a new direction and a change in income or family size. The report changes to help you receive the proper type and amount of financial assistance and help you avoid receiving too little or too much in advance.

Determining Alimony or Non-Deductible Payment in Divorce

Determining what is considered alimony and what is not is very important in a divorce tax situation.

Determining Alimony or Non-Deductible Payment in Divorce

Payments properly classified as alimony are deducted above the line on the payer’s return. For a payment to be classified as alimony and thus deductible by the payer and includable as income by the recipient, it must be made under a written divorce or separation instrument and meet all of the following requirements.

 

Guidelines on Determining Alimony for IRS:

  • The payment must be in cash or cash equivalents.
  • The payment is made to (or on behalf of) a spouse or former spouse.
  • The payer’s obligation to make payments must be relieved upon the recipient’s death. (See Example 7G-6 and the caution following it.)
  • When the payment is made, the payer and payee cannot be members of the same household and cannot file a joint return.
  • The divorce or separation instrument does not designate the payment as not includable in gross income of the recipient and not allowable as a deduction to the payer.
  • The payment cannot be explicit or disguised child support.

 

Alimony is taxable to the receiving spouse

Alimony is taxable to the receiving spouse and at the same time, the payor deducts the payment to compute adjusted gross income.. Alimony payments are treated as earned income to the recipient, potentially qualifying the recipient for an IRA contribution. This could also factor in to their eligibility for the earned income credit.

Lastly, to qualify as alimony for income tax, a payment must be made under a written agreement or decree; voluntary payments do not qualify. The agreement cannot expressly provide that the payment be treated as nonalimony.

 

Deducting Alimony

You do not have to itemize deductions to deduct your alimony payments. You must claim the deduction on Form 1040. You cannot use Form 1040AForm 1040EZ, or Form 1040NR. You must provide the social security number of the spouse or former spouse receiving the payments. If you don’t, you may have to pay a $50 penalty and your deduction may be disallowed.

 

Alimony, Divorce, and Taxes

For more information on the general requirements for alimony and for information on other decrees and agreements under which amounts paid and received may be treated as alimony see Publication 504Divorced or Separated Individuals. For more information on decrees and agreements executed before 1985, see the 2004 version of Publication 504.