Understanding Consequences of Joint Income Tax Returns

September 18, 2017

Innocent Spouse or Injured Spouse? These two terms are pertinent to joint federal income tax returns and are also the source of quite a bit of confusion. Many people do not fully understand the consequences of signing a joint income tax return. Doing so makes you jointly and severally liable for the tax due with returns, in addition to any additional tax, penalty and interest that may arise from an audit. For example, if you are a W-2 wage earner, your employer most likely withholds and pays over income taxes on your behalf. But what if your spouse is self-employed, earned $250,000 and paid no tax in? Come April 15th, you could receive a big tax bill, and must come up with the funds to pay it. And even though the tax deficit on your return is technically due to your spouse, you are liable for it because you signed a joint return. Now, that’s love!


Let’s take this one step further. Consider this scenario: you are completely uninvolved in your spouse’s business, and out of the $250,000 gross income earned, your spouse has deductions of $240,000 and reported $10,000 of taxable income. You sign the return, and all taxes due with the return are paid. But then, there’s an audit. As it turns out, some of those big deductions were, well, fictitious. That’s when you get hit with a bill of $80,000 for tax, penalty and interest! You knew nothing about this, but you’re still held liable because of that pesky joint and several liability. Here’s where ‘innocent spouse’ comes into play. If you meet the IRS requirements you may be able to get out of joint and several liability with innocent spouse relief. As soon as you become aware of a liability that you believe your spouse (or former spouse) should be accountable for, the application for innocent spouse protection can be filed on Form 8857 from the IRS.


So, then, who is an “injured spouse?” Unlike an innocent spouse, if there is a refund shown on your joint income tax return that is attributable to you, but the government is intending to keep that return for something attributable to your spouse, you could potentially be an injured spouse. Let’s put this in context — for example, your income tax return shows a refund of $8,000 and you can show that the refund is attributable to you. Your spouse, however, owes $10,000 in child support and the federal government intends to take that refund and use it as an offset for the child support. You can fill out Form 8379 to show that you should get the refund because the debt is not yours, but the refund is. This applies to certain debts such as federal tax, state income tax, state unemployment compensation, child support, spousal support and federal nontax debt (such as student loans).


Thus, when the time comes, review your joint tax return with scrutiny and be sure to determine the amount of personal knowledge you have regarding all the information it contains, including the circumstances of any tax liability. These are important pieces of information to have, as they are integral to the IRS when making the distinction between an injured or innocent spouse. 


At Post Polak, we know how confusing Federal and State tax laws can become. That’s why we take the time to walk through the steps of every tax form with our clients, giving comprehensive and understandable guidance throughout the process. Our attorneys specializing in Tax Law & Planning as well as Tax Disputes, have negotiated many settlements with the IRS, and have had years of successes in achieving the best outcomes possible for our clients. So, if you have questions regarding joint federal income tax returns or need assistance in determining your stance as an innocent or injured spouse, call our tax attorneys today at (973) 228-9900 for your free consultation, or contact us online. We know your rights, and we want you to know them too!