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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

When It Comes to Tax Returns, Know What You’re Signing

There is no better time than Women’s Financial Health Week, held January 13-17, to remind women of their tax rights. While tax issues are important to both men and women, Women’s Financial Health Week is dedicated to educating women about planning for financial situations. According to the New Jersey Society of Certified Public Accountants (NJSCPA), one of the most serious tax mistakes any spouse can make is to sign a joint return without carefully reviewing and thoroughly understanding every item.

The majority of taxpayers file their tax returns as “married filing jointly” because it is typically more favorable than “married filing separately.” However, when a couple files a joint tax return, both taxpayers become responsible, individually and jointly, for any tax due on the return and for any subsequent tax, interest, or penalty. That means, even if your husband is the one responsible for understating income or for claiming erroneous deductions, you could end up being responsible for the tax bill. This is true even if you later divorce.

Protect Yourself
CPAs say that you should never sign a tax return (or anything else, for that matter) unless you completely understand the document in question. That being said, the tax code does have innocent spouse provisions if you did not know about the errors your spouse made and you did not benefit from them. Keep in mind that the procedural requirements for claiming relief are substantial.

Innocent Spouse Relief
The Internal Revenue Service offers three forms of relief from joint and individual tax responsibility, one of which is called “Innocent Spouse Relief.” Under this provision, you may be relieved of the responsibility for paying tax, interest, and penalties if your spouse was dishonest on your joint tax return. To qualify for innocent spouse relief, you must meet all of the following conditions: (1) you must have filed a joint return; (2) there is an understatement of tax because of erroneous items entered by your spouse or former spouse; (3) you can establish at the time of signing the return that you did not know, and had no reason to know, of the tax understatement; and (4) taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement.

Separate Liability for Former Spouses
The separate liability election is another form of innocent spouse relief. Under this provision, if the IRS is attempting to collect taxes due on a joint return and you are divorced, legally separated, or have not lived with your spouse at any time during the 12 months prior to the date you file the election, you may be able to avoid or at least limit your liability. If you qualify, you will be liable only for the part of the tax (plus interest and penalties) that belongs to you. In other words, the understatement of tax (plus interest and penalties) is attributed to you and your spouse as if you had filed separately. One caveat: Relief under this rule is not available if assets are transferred between you and your husband so that one spouse owes all the tax and the other owns all the assets.

Equitable Relief
You may be eligible for “equitable relief” if you do not qualify for innocent spouse relief or the separate liability provision. Under the tax law, equitable relief only applies in cases where the proper amount of tax was shown on a joint return, but your spouse used the funds intended for paying the tax for another purpose. According to the IRS, factors weighing in favor of equitable relief include being divorced, legally separated, or living apart from your spouse; being abused by your spouse; facing economic hardship if relief was not granted; and having liability solely attributable to the other spouse.

How to Request Relief
The IRS does not automatically grant you relief, even if you clearly meet all the requirements. To elect innocent spouse, separation of liability, or equitable relief, you must file Form 8857, Request for Innocent Spouse Relief, no later than two years after the IRS first tried to collect the tax from you. You must attach a statement to Form 8857 explaining why you believe you qualify for relief. The IRS will review your form and advise you of its decision.

Learning More About Personal Finance
Women’s Financial Health Week, sponsored by the American Institute of Certified Public Accountants (AICPA) and Money magazine's Money for Women, is dedicated to educating women about the importance of managing their money and saving for the future, as well as informing them about the various ways to get their finances into shape. Although women are becoming more financially independent, many still don't manage their finances. A recent study found that women are less convinced of their investing abilities than men. Women also tend to carry more credit card debt than men and typically earn 60-80% of what men earn doing the same job. Compound that with the fact that half of all working women are employed in low-paying jobs that offer no retirement plan, and you can see why teaching women about financial planning is so important. For more information about women’s financial issues, go to www.womensfinancialhealthweek.com.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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