Trusted attorneys for Estate Planning and Administration, Real Estate and Tax Matters.

Can a joint tax return lead to tax charges for both spouses?

On Behalf of | Dec 28, 2023 | Tax Law |

When people get married, they usually combine their finances. They begin living together and may use one checking account for all major household expenses. It is common for one spouse to manage most of the financial matters for the family. Allowing one individual to balance the budget, pay financial obligations and file the household income tax return each year takes pressure off of the other spouse and helps ensure consistency.

However, the spouse who does not handle the finances is in a vulnerable position. They may not recognize early warning signs of financial struggles for the family and could end up implicated in any misconduct on the part of their spouse. For example, perhaps the Internal Revenue Service (IRS) sends notice of major tax issues. There may have been an underpayment of income taxes that the IRS views as fraudulent. Will both spouses end up facing criminal prosecution for tax returns filed by one spouse?

An innocent spouse does have some options

It is incredibly common for one spouse to manage the finances and to keep crucial information away from the other. The IRS does extend innocent spouse relief to those theoretically implicated in an income tax matter who had no knowledge of it beforehand. Such protection is not automatic. The person asking for relief will need to apply for the right kind of relief. Technically, innocent spouse relief is only available to those living in community property states, like Texas. However, there are other options for those living in New York.

A spouse who was unaware of their partner’s financial misconduct could qualify for separation of liability relief. The IRS can review the situation carefully if spouses divorce or separate. The spouse unaware of the tax issue could limit their risk of prosecution by separating liability from their spouse. If someone does not qualify for separation of liability relief, they could be eligible for equitable relief if their spouse understated their taxes.

If someone qualifies for tax relief as an innocent/uninvolved spouse, they can avoid criminal prosecution and may minimize their personal financial culpability for decisions made by their spouse. Such relief is not automatic. Someone will need to apply.

Especially if the discovery of financial misconduct leads to divorce or separation, the person feeling blindsided by a tax controversy may need to explore their options for protecting themselves from criminal charges caused by the misconduct of their spouse. Learning about innocent spouse relief and similar options may benefit those frightened about the possibility of criminal and financial consequences over issues with an income tax return.