IRS Eliminates Two Year Limit on Innocent Spouse Equitable Relief

In July 2011, the IRS changed its policy that once imposed a two year limit on innocent spouses seeking certain forms of relief from tax penalties and interest caused by their spouse’s misreporting on joint tax returns. A recent article from the Washington Post explained:

Under the innocent spouse umbrella are three types of relief — the innocent spouse provision itself (a tough enough contention to prove), plus categories for separation of liability and equitable relief. The removal of the two-year limit only affects requests under the equitable relief provision.

You have to meet several conditions to qualify for the innocent spouse relief provision, which relieves you of responsibility for paying tax, interest and penalties if your spouse did something wrong on your joint tax return. One of the conditions is that you have to establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax.

Under separation of liability, the IRS essentially allows the innocent spouse to pay the taxes he or she is responsible for and then pursues the other spouse (or former spouse) for his or her understatement of taxes, including interest and penalties.

If you do not qualify for either of the first two provisions, then you can try for equitable relief, which is a sort of catchall provision that allows the IRS to consider additional factors. For example, you didn’t know your spouse or former spouse misappropriated money intended to pay your joint tax bill for his or her benefit.

The third form of relief described in the article – called “equitable relief” – was previously banned if the innocent spouse did not apply within two years from the date when the tax deficiency was identified. Today, innocent spouses may apply for equitable relief even if two years have passed. Innocent spouses who previously applied and were denied due to the two year limit may re-apply. More information is available in IRS Publication 971.