Most taxpayers think because they are married, that they need to file a joint income tax return. When this happens and one spouse has a tax problem, the other may find the innocent spouse relief solution a good option. That is not correct since they can file separate tax returns based upon their own income and expenses. In some cases when a couple divorces, and they filed jointly, it is found out not all of the income was reported and thats where Innocent Spouse Relief can help. For instance, take this example:
I recently reviewed tax returns jointly filed by Ms. and Mr. Soris for the tax years 2015 to 2017. During that time frame, Ms. Soris operated a business as a fitness coach. The majority of the income she earned was from cash transactions and PayPal. From a review of the records provided by PayPal, not all of Ms. Soris’s income was included in their joint income tax returns. My calculation showed $150,000 was missing from gross receipts, just looking at the PayPal data alone. The good news, both the Internal Revenue Service and the New York State tax department have formal written programs and policies where taxpayers can voluntarily report and disclose under-reported income with their tax returns. It is important to keep in mind that the main goal of the tax authorities is to collect tax, and not to prosecute people. Therefore, if the taxpayer cooperates and signals a clear desire to repay the taxes owed, they will usually avoid a criminal charge and prosecution.
The policy rules of the Internal Revenue Service, that is contained in their Internal Revenue Manual section 38.3.1 (08-11-2014), a taxpayer can correct problems with their tax returns that may be viewed as potentially criminal in nature by following specific voluntary disclosure steps. The steps are 1) communicating to the IRS the issue (normally through an amended tax return being filed providing the details of the issue, along with a letter demonstrating a willingness to cooperate with the IRS in determining their correct tax liability), and 2) making good faith arrangements to pay the IRS back.
The New York State Tax department also has a process to get assurance of no criminal prosecution where the taxpayer discloses under-reported income to them through a voluntary disclosure process. To qualify, the taxpayer needs to 1) clearly explain why they owe more tax and file corrected tax returns, 2) pay those taxes, or create a payment plan for taxed now owed, and 3) agree to pay all future taxes, and file all tax returns timely. It is almost always my recommendation to go through with the voluntary disclosure programs, and file amended tax return to correct the previously filed tax returns to greatly limit any criminal risk that may be present.
The other process the taxpayer in this case can utilize is the innocent spouse relief solution. By filing those papers, since the tax liability was understated on their jointly filed tax return, he will most likely be able to have the taxes recomputed so that he only has to pay tax on his income, and the under reported income (and associated taxes) will be the sole responsibility of his ex-wife. She may contest this, but he will usually win that case.