Injured Spouse Relief: An Overview
Injured Spouse Relief is provided for under §6402 of the Internal Revenue Code. If the IRS grants your request for Injured Spouse Relief the IRS will stop taking part of one partner’s withholding, to pay the other’s debt. For example, let us assume the following:
You married in 20×5
In 20×5 you filed a joint tax return
In 20×4 your partner failed to pay their taxes
Assuming these facts the IRS could seize all of your 20×5 tax refund to cover that 20×4 debt.” However, a properly prepared injured spouse claim in many cases could stop that from happening. In many cases, it can actually reverse the seizure process.
How It Works:
Injured Spouse Relief works by allocating ownership of income and withholding between the partners. Once that allocation is complete the excess withholding is refunded to the injured spouse. There is a calculation that allows you to figure the appropriate allocation. At a high level that calculation helps you apportion:
- The tax associated with your income.
- The tax associated with your partner’s income.
Once you establish the allocation the injured partner can receive their portion of the withholding that:
- Was not needed to cover their taxes
- Was not their spouse’s
For example, let us assume the following facts:
you and your spouse made 150,000 dollars.
you owed a 10,000 dollars on that 150,000 dollars of income.
your spouse made 50,000 and you made 100,000.
your spouse withheld 5,000 and you withheld 10,000.
Together you withheld 15,000 in 20×5.
In 20×4 your spouse didn’t pay 10,000 in taxes.
In 20×6 when you calculate your joint taxes you owe 13,000.
You calculate your income is responsible for 9,000 of the tax
You calculate that your partner’s income is responsible 4,000 of the tax.
Let us also assume that in 20×6, you file an innocent spouse claim. Given the facts above:
- The max you would receive back is 1,000.
- That max is the amount of your withholding not attributable to your income.
Why Is Injured Spouse Relief Important
Injured spouse relief is particularly important when:
A primary breadwinner makes the request.
The spouse is unemployed, underemployed, or contributing in some other way to the family unit.*
The nonrequesting spouse has significant amounts due
The requesting spouse has withheld significant amounts.*
The requesting spouse discovers the nonrequesting spouse’s debt after a return is filed.*
*In many cases, appropriate tax planning combined with the appropriate claim mechanisms can render the IRS unable to legally collect on those past due amounts.
Injured Spouse Relief can also come into play when one spouse has an offset filed by another government agency or party with the US treasury. However, the specifics of this type of issue are beyond the scope of this article to fully explain. One issue that can make injured spouse claims go from simple to complicated in the blink of an eye, is community property laws. While this doesn’t affect my practice in Bangor, Maine, many states, especially those out West, are what we call “community property states”.
Community Property Issues: Overview
Community property states have different rules for determining ownership of marital property. This blog could devote a whole article to the idea of community property in general. Then another whole article about the nuances of community property in each state that uses that system. However, broadly speaking, community property laws make injured spouse cases more complicated, by making it less clear whose refund and/or withholding money the IRS actually has.
How Non-Community Property States Work
In general, non-community property states assign ownership of income to the person who has the job/business. However, the IRS taxes couples on the joint income if they file Married Filing Jointly. The key point here is that calculating tax due is different from who owns the income. We often intuitively think of married people owning/sharing property together, but in the case of non-community property states, that simply is not true. This state-level discrepancy between legal ownership and the Married Filing Jointly Election our government provides the ability to make an Injured Spouse Claims.
How Community Property States Work
However, again broadly speaking, in community property states both spouses legal own both income streams, no matter who actually goes out and earns it. This is important because the Internal Revenue Code defers to local law on issues of ownership. This means that two otherwise identical couples living in different states can have vastly different injured spouse relief rights. In community property states, even if only one spouse earns the income, it can be considered owned by both spouses. If that is the case they may not be eligible for Injured Spouse Relief.