Joe and Sally file a joint income tax return. Unbeknownst to Sally, Joe has underreported his business income and now she is on the hook for the tax. The answer is to file an Innocent Spouse claim and sever the joint liability. Will it work?
The IRS accepts these claims less than 25% of the time. These claims usually get turned down because the innocent spouse, while not having direct knowledge, should have realized that the reported income was too low. Additionally, he or she benefited from the underpayment of the tax. If the country club dues were $30k and they live in a $500k house while sending their kids to a private school, the idea that the business only produces $50k of income should be obviously wrong to anybody.
The scenario that does get accepted are ones where one spouse not only underreports his or her income but keeps their lifestyle in line with the reported income. Let’s say Joe skims $200k from his business and then hides that money overseas. Sally would have no reason to suspect that the tax return was incorrect and she would have received no benefit from the tax evasion.
Interestingly, there is a situation that can improve Sally’s chance of winning this claim. Innocent Spouse claims require the IRS to notify the other spouse about the claim and the results. Many times, a non-innocent spouse will submit information to the IRS disputing the other spouse’s claim. Inevitably this spouse shows themselves to be such a dick that the innocent spouse claims have a better chance of being accepted because the IRS people develop sympathy for the innocent spouse.
