How Leveraging Innocent Spouse Relief Can Help At Tax Time

In their role as a registered tax return preparer, enrolled agents often find themselves wearing many hats.  Offering up suggestions for mitigating a bad marriage is not exactly something that would qualify as a typical function of anenrolled agent.  But the IRS has incorporated a number of features into tax law that make this scenario more than possible, a subject covered in most tax CPE courses on marriage and taxation.   One such scenario is dealing with IRS tax liability under what is called the “Innocent Spouse Program.”

Typically, a husband and wife assume equal liability when it comes to income tax on a joint return. However, if one spouses intentionally commits fraud without the other partner’s knowledge, then that individual, known as the “innocent spouse” in this relationship, may not be liable.

By requesting what the IRS deems “Innocent Spouse” consideration, spouses in this predicament can be excused from their obligation to paying taxes, interest, and penalties.

What Makes a Spouse Innocent?: IRS Criteria

According to the IRS, the following conditions must be met before the IRS will consider agreeing to grand someone Innocent Spouse relief:

(1)   Taxpayer must have filed a joint return containing incorrect information relating to the spouse

(2)   Taxpayer is able to establish that, at the time of signing the joint return, they had no reasonable knowledge of either an error on the return or intentional fraud

(3)   After considering the totality of the fact, the IRS believes it would be unfair to hold the taxpayer responsible for these errors or fraud

For the purposes of qualifying for the innocent spouse program, errors on the tax return could pertain to unreported income or a specific incorrect deduction or credit.  As outlined in most EA CPE courses on the subject, common errors include fabricating business deductions or failing to report 100% of an individuals’s income.

Rigorous Standard of Proof

In situations where a spouse had knowledge of the error, or fraud, when the return was prepared and filed, Innocent Spouse Relief is not an option available to them, according to the IRS. In such cases, both spouses will remain equally liable for all of the taxes as well as the penalties and interest that flow from this infraction. Furthermore, the IRS considers a spouse’s reasonable knowledge of this offense grounds for dismissal of this relief. However, by the same token, the IRS assures taxpayers that it always considers the complete range of facts and circumstances in this decision-making process. These factors include the nature of the error, as well as its size; a taxpayer’s unique financial situation, educational background and business knowledge; the degree of a spouse’s actual participation in the fraud, including whether the so-called innocent spouse failed to question the return manner fitting a “reasonable person.”

Likewise, the IRS will consider a number of other question to calculate whether holding the innocent spouse accountable for the error is a fair act or not.  Among these include:

Did the innocent spouse derive a significant benefit, either directly or indirectly, from the error?
Has “bad” spouse abandoned the “innocent” spouse?
Is the couple divorced or separated?

Divorce Not a Given for Acceptance

Not all divorced or separated taxpayers will qualify for Innocent Spouse Relief. However, if the innocent spouse successfully demonstrates no prior or direct knowledge of the incorrect tax filing, the law may offer them some relief from IRS debt.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

If you have a business, perhaps you consider bookkeeping and tax preparation among your more unsavory jobs. After all, who wouldn’t? These two jobs, bookkeeping and tax preparation, can be among the most laborious of the duties you have to shoulder when you run your own business. And the problem is, it doesn’t even have a lot to do with your business itself, except that you, of course, are doing your job as a citizen and making sure that you pay your taxes right and on time.

First of all, let’s talk a little bit about tax preparation and what it is. You as a citizen and business owner have the obligation to your government that you must prepare and file regular tax returns; this usually happens at least once a year but may happen quarterly, depending on your specific circumstances. Doing this can be quite laborious, because you have to figure out what all of your liabilities and deductions are, any exemptions you have from taxation, and so on. You’ll need to pay your taxes on time in order that you won’t be held responsible for further late fees and penalties because you filed your taxes late.

Now, of course, you can do this yourself (and you can also do the bookkeeping associated with tax preparation, because you’ll need those figures to properly pay taxes and keep abreast of your business financially). But the fact of the matter is, a lot of people don’t have the ability to do those jobs themselves, and they surely don’t enjoy them even if they can do them.

So now, I ask you: Would you rather be spending time running your business, working with customers, and doing what you really love to do? Would you like to leave the duties of tax preparation and bookkeeping to someone else?

Using someone (firm or individual) who is versed in current tax laws and tax codes seems like a reasonable solution, doesn’t it? After all, this person or firm is going to know exactly what current laws are, such that you won’t unwittingly overlook something you should know about so that you may have to pay fines or other expenses for improperly filed taxes, such as late fees.

Outsourcing these arduous tasks to someone who not only can do them better than you can but may actually enjoy them as well, as a livelihood, makes perfect sense, because their expertise will make your job much easier, and will make sure that your taxes are filed properly.

And by the way, you can also outsource bookkeeping duties as well. These are your day-to-day financial accountings of your business; if you have trouble keeping on top of this because the business itself takes up so much of your time (and why wouldn’t it?), assigning bookkeeping duties to someone else who’s an expert at doing that, too, may be a very smart choice.  Which is best for you? Outsource tax preparation and/or bookkeeping, or keep them in your own task list? It’s your decision.

The tax preparation career is a great opportunity for those who enjoy working with people and are good with numbers. It is a misconception to think that tax preparation services are needed only during the busy tax season from January through April. Many individuals and companies have a need for tax preparation services throughout the year as a result of filing for filing extensions.

Listed below are a few strategies to assist you in planning to become a Tax Preparation Consultant and choosing the right income tax course.

You may enroll in one of the programs offered by a tax preparation service. To enroll you must have either a GED or high school diploma and several companies require that you have some experience either field. However, there are also firms which will train entry level candidates as long as you can demonstrate proficiency with numbers and comfortable win working with a calculator.

The best strategy is to call these agencies as early as September before the new tax filing season and inquire as to their admission policies. You will also want to inquire as to their hiring policies upon program completion. In effect, you want to know what the likelihood is that you will be hired as a regular employee after the rush of tax season.

If you would rather not be bound by a traditional classroom schedule due to family or other work obligations, you can also enroll in an online program to obtain certification. These courses may be offered by both private education companies as well as the continuing education programs of many local collages.

With regard to private instructional programs, it is best to perform careful due diligence by contacting such consumer reporting agencies as the Better Business Bureau to  ensure the program of your choice  has a good reputation.

A final method of preparing for this career is to complete your own taxes, or as much as you can if your situation is rather complicated. This method is probably best used in conjunction with a formal training program so that you can get exposure to all types of situations in completing forms on behalf of individuals, families, as well as business entities.  l

There are currently only two states that require tax preparers to be licensed through their state education departments. These states are Oregon and California. However there is much talk of instituting federal regulations for the licensing of all those who charge a fee for the preparation of taxes.

This is of special concern should you seek to operate a solo practice. In this event, check with your secretary of state for business licensing requirements. If you work for a tax preparation company, they likely already have the necessary licensure so this is not an issue of concern.

The way we do taxes in this country has changed. No more going down to the local library or post office and collecting all the necessary forms. No more spending hours penciling in incomes and deductions. You’re halfway through your return and discover you need another form? Simply download it; and if you file with one of many online services it may be automatically attached to your return. Fifty-seven percent of individual tax payers e-filed in 2007, an increase from 2006 of three percent. This year even more people will take advantage of e-filing. Why change your payroll provider?

A lawyer with the necessary skills to successfully manage tax issues we face today and will take time to assess your tax return and come up with the right strategy. These professionals have years of experience working with tax codes and regulations and are ready to fight for their rights. When using a keyboard tax lawyer in principle, tax issues can be avoided.

Why E-file? on-line application is easy and safe. And you come back much faster if you choose direct deposit to receive a refund of only 10 days.

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Search for dealers to offer free trial version to try the system. Not four software company offers training for you? If a new system for your company, you need to train their staff to use. If company in training, you can save much time and effort.

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