Separation of liability is an innocent spouse defense that allocates a tax deficiency between two spouses in proportion to each spouse’s contribution to the deficiency. While the IRS can generally collect the entire tax debt for a joint return from either spouse, separation of liability—along with the other innocent spouse relief options—prevents the IRS from collecting tax from one spouse when the erroneous item on the return is attributable to the other spouse.
The Conditions for Separation of Liability Relief
In order to qualify for separation of liability, you must have filed a joint return and meet one of the following conditions:
- You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. You are considered no longer married if you are widowed.
- You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you filed the form requesting innocent spouse relief.
If you are living apart from and are estranged from your spouse, then you are not a member of the same household. However, if you live in the same dwelling, you do not qualify for separation of liability relief. Even if you do live in separate dwellings, you do not qualify if you are not estranged and one spouse is only temporarily absent from the other’s household.
Limitations on Separation of Liability Relief
Even if you meet the above conditions, you still may not receive separation of liability relief if you and your spouse transferred assets to each other as part of a fraudulent scheme, if you had actual knowledge of the erroneous item that caused the understatement of tax, or if your spouse transferred property to you to avoid tax or the payment of tax.
Actual knowledge is shown when you knew about the receipt of an item of unreported income, or you knew that the expense for a deduction was not incurred. You do not need to have known of the proper tax treatment of an item.
For property transfers from your spouse, a transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is one year before the date on which the IRS sent its first letter of proposed deficiency. You can rebut this presumption by showing that the main purpose was not the avoidance of tax, or if it was made under a divorce decree or separation agreement.
If you do not meet the requirements for separation of liability relief, you may be able to use other innocent spouse defenses, or negotiate an Offer in Compromise to reduce your tax debt.