Bills from the IRS on Underreported Taxes
You received your mail today. There is a letter from the Internal Revenue Service. It is not the period of tax refund so it can’t be anything good. You are tempted to throw it away, but you open it anyway. It is a “Notice of Proposed Deficiency” that says your spouse underreported income to the Internal Revenue Service last year. You separated a few weeks ago. You now owe $1,500 and know you can’t afford to pay it back. The IRS has different ways to verify the income taxpayers report on their returns. Most businesses and organizations are required to file “information returns” with the IRS, — IRS Forms W-2, IRS Forms 1099, and others. The IRS matches the information on these information returns to your tax return. If they do not match, you will get a notice requesting the difference.
Is there anything you can do?
Most of the time a husband and wife submitting a joint tax return are both held responsible for any tax debts that come from that tax return. A tax debt can be from an underpayment of taxes or an understatement of taxes. Understatements are cases when the tax return says that you owe one amount and you owe more in actual sense. If your tax return does not report all your income or claims a credit you are not supposed to take, this can cause an understatement of tax. The Internal Revenue Service can ask for payment from just one spouse or from both. The Internal Revenue Service calls this joint and several liabilities. This normally becomes an issue when married couples separate or divorce.
What you should do:
· Include all your income on your tax return.
· Keep precise and complete records of your income throughout the year as you earn it.
· Wait until you get all your income statements before filing your tax return. Otherwise, you may have to file an amended return.
Check the records and informational returns you get from your employer, bank, or other sources of income (IRS Forms W-2, 1098, 1099, etc.) to make sure they’re exact.
Make sure you know what income you earned is taxable and what is not
Your tax liability may be influenced by your occupation. For example: If you’re a member of the military, clergy, etc. Other income such as fees for services, or foster care payments, from a state may also affect your tax liability. If you have questions about the taxability of your income, ask the IRS or consult a tax expert. Visit our page on choosing a Tax Return Preparer for tips before you select one. Low Income Taxpayer Clinics are available for qualified individuals.
United States (U.S.) citizens and resident aliens generally also need to report income received from foreign sources.
Other sources of income can include virtual currencies and amounts from bartering transactions.
If you receive tips, you’ll also have to report these as income.
A complete list of taxable and non-taxable income is available in IRS Publication 525 Taxable and Non-Taxable Income.
Important Note:
Filing jointly is an election. The Internal Revenue Service does not require married couples to file jointly. You can keep away from joint liability by submitting separately.
What Sorts of relief might help me?
A spouse who assumes it would be unfair to make him or her pay the tax debt can apply for three different types of relief. These different reliefs are:
- Innocent Spouse relief
- Relief by Separation of Liability, and
- Equitable Relief.
The first two types of relief must be requested within two years of when collection activity begins. The last type of relief can be requested until the deadline for the IRS to collect the debt has expired. This is an important change in the regulations!
I already applied for relief but I was rejected!
If you were denied relief because you filed your application too late, you may be able to file a new application. The IRS used to say you only had two years to apply for Equitable Relief now you can request this type of relief until the IRS can no longer collect on the debt.
What are the main differences between these types of relief?
To qualify for Innocent Spouse Relief the Internal Revenue Service requires that you did not know about the incorrectly reported income, credit or expense nor had no reason to know about it. The error has to be to an item of your spouse’s, such as if he or she misreported income or misstated business expenses. Under Equitable Relief, the IRS will consider your knowledge in deciding whether you can get Equitable Relief, but it is only one of many of your circumstances they will consider. If your spouse left out reporting interest from an account he or she had opened in your name without your knowledge, you might be eligible for Equitable Relief but not Innocent Spouse Relief.
Are there limits on when the relief is available?
Innocent Spouse Relief is not available when you accurately report your income, credits and expenses, but your spouse underpaid your taxes when he or she mailed in your return. Equitable Relief is available in underpayment situations.
Separation of Liability is usually only available when you are divorced, legally separated or living in a separate household for an entire year before you submit a request. If you actually knew of the problem, you are not entitled to a Separation of Liability. You cannot qualify for a refund of payments made before you requested Separation of Liability. You may be able to receive a refund under Innocent Spouse and Equitable relief. The good news is you simply just have to file one form. At present this form is Form 8857.
EQUITABLE RELIEF
The third type of relief is known as Equitable Relief. If you apply for either Innocent Spouse Relief or Relief by Separation of Liability and do not qualify for those types of relief, the Internal Revenue Service will automatically deem you qualified for Equitable Relief.
The IRS is still operating on new revenue procedures for Equitable Relief. Some factors that the IRS said will favor relief are:
- You would suffer economic hardship if relief isn’t granted
- Your spouse abused you.
- You did not have actual knowledge of the problem or you did not have reason to know.
- You are no longer married or you are separated and not just temporarily living apart from the non-requesting spouse.
- You were in poor physical or mental health when you signed the return or you were in poor health when you filed your application for relief.
- The requesting spouse has a legal obligation to pay the debt through a divorce agreement or decree.
- You did not have actual knowledge of the problem or you did not have reason to know.
- Tax Refund You have tried to follow the tax laws in the tax years following the year in which you are requesting relief.