Tax Day, the deadline to file your taxes, has come and gone for another year, and small business owners can finally breathe a sigh of relief. Or can they?
Springtime is often associated with rebirth, new flowers, and the end of frosty winters. But, for some, cold and dark times have just begun. Tax season can bring the death of a business, including insolvency, liquidation, and the freezing of assets. Luckily for spouses of bankrupt business owners, there’s still reason to celebrate the coming warmth of spring.
Since a majority of spouses file joint tax returns, in previous years, a husband or wife of a bankrupt business owner would also pay the price. Primarily women, spouses could claim lack of knowledge or control over the business’ finances, but the government bureaucracy provided little real relief.
However, this year, the Internal Revenue Service (IRS) released new guidelines designed to provide more attainable support for spouses who request equitable relief from income tax liability.
“The IRS is significantly changing the way we determine innocent spouse relief,” said IRS Commissioner Doug Shulman, according to a press release1. “These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”
There are three situations that would qualify a spouse for relief, according to experts at InnocentSpouseRelief.com2.
1. “Classic” Innocent Spouse Relief Requirements. At the time of a signed-joint return, if a spouse did not know, or did not have any reason to know, that there was an understatement of tax due to erroneous items, the IRS will not hold the spouse liable, reports InnocentSpouceRelief.com. In this instance, the spouse qualifies for “classic” relief.
2. Relief by Separation of Liability Requirements. Another form of relief pertains only for unpaid tax amounts — no refunds are allowed. For a spouse who was not a member of the same household during the twelve months prior to the time of filing, this relief absolves the spouse from an underpayment of tax, InnocentSpouceRelief.com explains.
3. Equitable Relief Requirements. Finally, if a person is not eligible for “classic” innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law, he or she may still qualify under equitable relief requirements. It is to these requirements that the IRS has made the most significant changes.
In the past, the requesting spouse’s claim for equitable relief needed to be filed no later than two years after the date of the Service’s first collection activity. Now, this deadline has been eliminated.
In addition, the new proposed revenue procedure provides for certain streamlined case determinations, new guidance on the potential impact of economic hardship, and weight to be accorded to certain factual circumstances in determining equitable relief.
“If the non-requesting spouse abused the requesting spouse or maintained control of family finances by restricting access to financial information, this factor will weigh heavily in favor of relief. This holds true even if the requesting spouse knew or had reason to know about misstatements on joint tax returns,” explains the new IRS proposal3.
The changes to the innocent spouse relief requirements make the qualifying criteria more flexible. So, no one factor or a majority of factors necessarily controls the final determination, according to the new IRS proposal3.
It’s hard to imagine that a spouse would put you in such an economic bind. But, in the event of separation, divorce, or sudden death, it’s important to understand your legal rights as the spouse of a small business owner.
So, this spring, if you find yourself in trouble with the IRS due to a spousal bankruptcy filing, consider taking the following actions:
1. Always file your tax return or extension with the IRS on time;
2. Know the law by reviewing innocent spouse relief guidelines here; and
3. Contact an attorney regarding your legal rights.
Whatever happens, there’s usually a reason why showers bring May flowers. Like young flora and fauna, spouses not responsible for a bankruptcy can, too, find shelter in time.
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