What is Separation of Liability Relief?

Separation of Liability Relief is one of three types of tax relief offered by the Internal Revenue Service (IRS) in the United States for people who filed a joint tax return and are later held responsible for underpaid taxes, penalties, or interest. This form of relief is specifically designed to help divorced, separated, or legally estranged individuals from being unfairly held accountable for tax issues that stem from their spouse or former spouse. It essentially “separates” the tax liability between the two parties, ensuring that each person is responsible only for the portion of the tax liability directly related to their own income and tax filings.

Eligibility Criteria

In order to qualify for Separation of Liability Relief, several key eligibility requirements must be met:

• Filing Status: You must have filed a joint tax return with your spouse or former spouse. The tax liability must stem from this jointly filed return.
• Marital Status: At the time of applying for relief, you must no longer be married to, or must be legally separated from, the person with whom you filed the joint return. Alternatively, you could also qualify if you have not lived with your spouse for at least 12 consecutive months before applying for relief.
• Unreported Items: The tax debt must be due to understated taxes that result from your spouse's errors, such as unreported income or improperly claimed deductions or credits.
• Knowledge or Involvement: You cannot have had actual knowledge of the understated tax at the time the joint return was signed. However, there are certain conditions where knowledge may not completely disqualify you from relief. If you were coerced or subject to duress in signing the joint return, you may still be eligible for Separation of Liability Relief.

Allocation of Liability

Once Separation of Liability Relief is granted, the IRS divides the tax liability between you and your spouse or former spouse. This allocation is based on each individual’s contribution to the error that caused the tax liability. For example, if the understated taxes were a result of unreported income that only your spouse earned, the liability for that portion would fall entirely on your spouse.

However, it is important to note that any portion of the tax that is attributed to joint activity, such as jointly owned business income or shared deductions, could still be allocated between both parties.

Limitations and Restrictions

There are certain limitations to Separation of Liability Relief that you should be aware of:

• Timely Filing: You must request Separation of Liability Relief within two years of the IRS beginning collection activities against you, such as issuing a levy or garnishing your wages.
• No Fraudulent Actions: You will not be granted relief if you are found to have engaged in any fraudulent activities related to the tax return in question.
• Innocent Spouse Relief Overlap: Separation of Liability Relief is distinct from another form of tax relief called Innocent Spouse Relief. While both deal with joint tax liabilities, Innocent Spouse Relief is broader and may cover scenarios where you remain married. However, you cannot qualify for Separation of Liability Relief if you have already been granted Innocent Spouse Relief for the same tax period.

How to Apply

To apply for Separation of Liability Relief, you need to file Form 8857, also known as the “Request for Innocent Spouse Relief,” with the IRS. Even though this form is primarily used for requesting Innocent Spouse Relief, it is also used for Separation of Liability Relief and Equitable Relief (the third type of relief offered). The IRS will review your case and may request additional information to properly assess your eligibility.

After submitting the form, the IRS notifies your spouse or former spouse about the request for relief. They are given the opportunity to participate in the process and provide their own information, which can be relevant to the IRS’s final determination. This involvement of the other spouse is important to the process but can sometimes complicate matters if there is significant conflict between the two parties.

Benefits of Separation of Liability Relief

The primary benefit of Separation of Liability Relief is that it provides a fair solution for those who should not be held fully accountable for tax debts that they did not directly create or benefit from. By allocating the tax debt according to each person's involvement, it can greatly reduce the financial burden that could otherwise follow someone after a divorce or separation. This is particularly crucial for individuals who may not have had control or even knowledge of the financial dealings that led to the tax debt.

The Bottom Line

Separation of Liability Relief is a tax relief option for individuals who have filed joint tax returns but are no longer married or are legally separated and find themselves responsible for tax liabilities primarily caused by their spouse. It aims to ensure fairness by dividing the liability based on each party's contribution to the tax understatement. While it offers significant benefits to eligible individuals, it also comes with specific criteria and deadlines. Those considering this relief should carefully review their eligibility and consult with a tax professional if needed to avoid common pitfalls.