Tax issues are often on the mind of bankruptcy filers. As I discussed on this blog last October, there are certain circumstances when you can discharge tax debts in bankruptcy, but these conditions are somewhat limited and do not apply to many bankruptcy filers.
One scenario that can be very frustrating involves an “innocent spouse.” Imagine a situation where your husband (or wife) manages all of the family’s finances and you have absolutely no knowledge of his failure to report income or his phony deduction claims. If you sign and file a joint return, the IRS will hold you equally responsible with your spouse for any tax liability resulting from the errors on your tax return.
However, if you truly had no knowledge, information or control over your spouse’s tax dealings, you can petition the IRS to declare you as an innocent spouse and reduce or eliminate your personal liability for overdue tax payments, penalties and interest.
Until just a few days ago, a woman or man possibly eligible for innocent spouse relief had to file papers with the IRS to request innocent spouse status within two (2) years from the date of the first delinquent tax collection notice. If you waited more than two years to file your IRS Form 8857, you were out of luck and could not petition the IRS for this type of relief.
With innocent spouse relief off the table, a struggling single mom – and perhaps an abused mom – might have little recourse to address tens of thousands of dollars of non-dischargeable tax debt that arose during her marriage to a controlling, abusive husband who cheated on his taxes but coerced his wife to sign the joint return.
The rules for innocent spouse relief have now changed. According to the Wall Street Journal’s online edition dated July 26 2011, the IRS is no longer applying the “two year rule” to innocent spouse claims. Further the IRS will apply this new rule to pending innocent spouse applications and may even suspend collection efforts in older cases.
For bankruptcy lawyers, this expansion of the innocent spouse rules may make bankruptcy relief more comprehensive for clients with huge tax burdens in addition to other debts, and it may offer a viable alternative to bankruptcy in some cases.