Spouse Didn't Pay Business Taxes: Am I Liable on a Joint Return?

Am I liable if my spouse did not pay business taxes on our joint return?

It depends on the tax and the return. If you signed a joint return, each spouse is generally liable for the whole income tax on it, including tax on the other spouse's business profit (26 U.S.C. 6013(d)(3)). The IRS says this holds even if you later divorce, a divorce decree makes your spouse responsible, or your spouse earned all the income (IRS: Innocent spouse relief).

Relief exists, with limits. Form 8857 can relieve tax, interest and penalties on a joint return that trace to your spouse. It cannot relieve tax the business itself owes.

Profit that passes through to an owner's Form 1040 (a sole proprietorship, or a partnership or S corporation share) sits on the joint return (sole proprietorships, partnerships, S corporations). A C corporation's own income tax does not: it is a separate taxpayer (corporations).

Sources: innocent spouse and equitable relief pages. Whether you owe the business's payroll tax personally depends on your own role in the business, not on the joint return; see the trust fund recovery penalty guide. Even if you do not owe it, a federal tax lien for tax your spouse owes attaches to your spouse's rights in property you own together, and a court can order the whole property sold, with you compensated from the proceeds (IRM 5.17.2). In community property states, state law decides whether community property answers for one spouse's separate debt (Publication 555).

A case stops being simple when:

• An IRS letter names a joint year and the tax comes from your spouse's business.
• Several years are involved, because relief is decided year by year.
• The IRS has already sent a final notice of intent to levy (taking money from wages, a bank account or benefits) and your right to a hearing, usually Letter 11 or Letter 1058; filed a claim in court; or applied your refund to a joint balance from another year and told you of your right to file Form 8857. Each starts a deadline clock (see below).
• Your spouse has died.
• You helped run the business or kept its books, which bears on what you "knew".
• Part of the tax comes from your own income.
• You lived in a community property state.
• Your spouse's income and expenses for each year are missing or in your spouse's hands. Separation of liability requires you to establish how the items divide (Publication 971).

The clock is short. Innocent spouse and separation of liability requests are generally due within 2 years of the IRS's first collection step; equitable relief for a balance due, while the IRS can still collect (table below). A final notice of intent to levy also gives you 30 days to request a collection due process hearing, where spousal defenses can be raised (26 U.S.C. 6330). Check the date on every letter against each joint year.

Gather first: every IRS letter with its date; the joint return for each year at issue; your spouse's business records (bank statements, invoices, 1099s); the dates of marriage, separation, divorce or death; and every state you lived in.

Is the tax understated or unpaid?

Understated tax means the return showed too little tax. Unpaid tax means the return showed the right tax and it was not paid. The type decides the relief: understated tax can qualify for any of the three kinds below, unpaid tax only for equitable relief.

• Understated: your spouse left out income, claimed deductions or credits they were not entitled to, or misreported the value of assets (IRS: Equitable relief). It usually surfaces through an audit or a notice that income did not match. The IRS can assess more tax on a filed return only within a set period, which is longer when much income is left off and unlimited for fraud or an unfiled return (26 U.S.C. 6501); the amending guide has the limits.
• Unpaid: the tax was properly shown on the return but not paid, for example a balance due on the return that was left open (Form 8857 instructions).

A year can have both, and each amount is judged by its type.

What are innocent spouse relief, separation of liability and equitable relief?

They are the three kinds of relief from joint liability. One request, Form 8857, covers all three, and you do not have to pick: the IRS considers the request under the types you may qualify for (IRS: Innocent spouse relief).

Source: Publication 971, 26 U.S.C. 6015 and the separation of liability page. Equitable relief is the fallback: it is available only if you do not qualify for the other two.

Does it matter what I knew about my spouse's business?

Yes. What you knew, or should have known when you signed, is the main test for innocent spouse relief and one factor in equitable relief.

• Actual knowledge means you knew the income was received, knew facts that made a deduction or credit unallowable, or knew an expense was false or inflated. Knowing the income was received is enough even if you did not know it was taxable (Publication 971).
• Reason to know (a bar to innocent spouse relief, not to separation of liability) is judged on facts such as how large the item was against your other income, your financial situation, your education and business experience, how involved you were in the activity, whether you failed to ask about items a reasonable person would question, and whether the item broke a pattern in earlier returns (Publication 971).
• Separation of liability is blocked only by actual knowledge, which the IRS must demonstrate (26 U.S.C. 6015(c)(3)(C)). The IRS may infer it from facts such as deliberately avoiding learning about an item. The IRS web page for this relief words the bar more broadly and lists reason to know; the statute and Publication 971 require actual knowledge. You must prove the other requirements, including how the erroneous items divide between you and your spouse (Publication 971), which is why the business records matter.
• Partial relief is possible if you knew of an item but not its full extent: the part you did not know about can qualify (Form 8857 instructions).
• Property transfers: relief is denied if the IRS proves you and your spouse moved property between you as part of a fraudulent scheme. Under separation of liability, your share also grows by the value of property your spouse transferred to you mainly to avoid tax. A transfer within 1 year before the IRS's first letter proposing a deficiency is presumed to be for that purpose, unless made under a divorce decree or shown otherwise (Publication 971; 26 U.S.C. 6015(c)).
• Abuse: relief may still be available if you knew but were a victim of abuse before signing and did not challenge the items out of fear. If you signed under duress, the return is not a joint return for you (Publication 971).
• Not your signature or consent: if you did not sign or agree to file jointly, the IRS says your joint election is invalid. That is separate from these relief types (IRS: Tax relief for spouses).

What does the IRS weigh for equitable relief, especially for tax that was never paid?

Equitable relief asks whether it would be unfair to hold you liable, given all the facts. No one factor, and no majority of factors, decides it (Revenue Procedure 2013-34).

To be considered, you must have filed a joint return, not qualify for the other two types, and asked on time, and the tax must come at least in part from your spouse's item or income. Exceptions to that last condition cover community property, an item titled in your name that your spouse actually owned and controlled (titled items are presumed yours, and you can rebut that), money meant for tax that your spouse misused without your knowledge, abuse, and your spouse's fraud. The revenue procedure adds: no fraudulent transfers between you, no transfer of property to you to avoid tax (relief is then limited), and no knowing part in a fraudulent return (Revenue Procedure 2013-34).

The revenue procedure then sets a streamlined path: if you establish that you are no longer married, would suffer economic hardship without relief, and did not know or have reason to know of the understatement (or, for unpaid tax, that your spouse would not or could not pay), relief is granted on a streamlined basis. If you cannot show all three, the IRS weighs the factors below.

Source: Publication 971 and Revenue Procedure 2013-34. The IRS equitable relief web page words knowledge as a bar; the publication and revenue procedure treat it as one factor, not weighed more heavily than the others, that abuse or financial control can outweigh. What you knew is examined either way.

For unpaid tax, the IRS asks whether you reasonably expected your spouse to pay. That expectation is presumed if the couple asked for an installment agreement, with a realistic plan, within 90 days of the later of the payment due date or the filing date. It generally weighs against relief if you knew of your spouse's earlier bankruptcies, money trouble or IRS problems. Evasiveness by your spouse, your role in household and business finances, and unusual spending count too.

How do I request relief on Form 8857, and by when?

File Form 8857, Request for Innocent Spouse Relief, within the deadlines in the table below. Do not attach it to a return or send it to the Tax Court. Send it to the address or fax number in the instructions, even if you are already dealing with an IRS employee on an audit or collection.

1. List each tax year at issue. One form covers up to six years; use a separate form for more years or for a different spouse or former spouse (Publication 971).
2. Attach the documents that support your case. The IRS says to request relief as soon as you learn of the tax, so do not hold the form back for missing papers (IRS: Innocent spouse relief).
3. Include everything you want considered. A Tax Court review may be limited to what you and your spouse gave the IRS and to newly discovered or previously unavailable information.
4. Expect the IRS to contact your spouse or former spouse. The law requires it, with no exception for abuse. It does not share your current name, address, phone or employer, but other information you submit may be disclosed, so the instructions advise redacting personal details (Form 8857 instructions).
5. If you received a notice of deficiency, also file a Tax Court petition by the date on the notice (generally 90 days, or 150 days if the notice is addressed outside the United States) and raise relief as a defense. That deadline does not pause while the IRS reviews your form.

The IRS says relief is not available for a year in which you signed an offer in compromise or a closing agreement covering the same tax, a court finally denied relief, or you took part in the court case without asking for it (IRS: Innocent spouse relief; Form 8857 instructions). Ask about this before signing either.

Source: Form 8857 instructions and 26 U.S.C. 6015. The IRS web page words the 2 years rule as running from a notice of audit or tax due, while the instructions and statute count from the first collection activity. A notice of deficiency, a lien filing and a demand for payment do not start it (26 CFR 1.6015-5(b)(2)).

If a levy or other action looks imminent, the Taxpayer Advocate Service can help at no charge when a problem causes financial difficulty or an immediate threat of action (Form 8857 instructions).

Can the IRS collect from me while my request is pending?

Generally not for the years in your request. For each year you ask relief for, the IRS cannot collect from you while the request is pending, which includes the time the Tax Court is reviewing it (Form 8857 instructions; 26 U.S.C. 6015(e)).

• Interest and penalties keep accruing during that time.
• When the case ends, the collection period is extended by the time the request was pending plus 60 days.
• The IRS says a review can take 6 months or longer. Keep filing and paying your taxes as usual meanwhile (IRS: Equitable relief).

My spouse died and the IRS letters started: who owes the tax?

Death does not end liability on a joint return. Both spouses were liable for the whole tax, so a surviving spouse can face a joint-year balance, and the decedent's estate can be liable too (26 U.S.C. 6013(d)(3); the transferee-liability example in Publication 971). The IRS may look to either. Who pays what from the estate is an executor question: see the executor guide.

• If you survived and did not know: you file Form 8857 yourself. A widow or widower counts as "no longer married" for separation of liability (IRS: Separation of liability). For equitable relief, widowed counts as no longer married unless you are an heir to an estate with enough assets to pay the tax (Revenue Procedure 2013-34).
• If the person who died was the one who did not know: the personal representative can pursue a request the decedent filed, or file one, as long as the decedent met the requirements while alive (Publication 971; Publication 559).
• A joint return you filed alone after the death: if an executor is appointed afterward, the executor may disaffirm it by filing a separate return for the decedent within 1 year after your due date, extensions included. Yours then stands as your separate return (26 CFR 1.6013-1(d)(5)).
• Relief is not the end of the estate's reach: even if you are relieved, the IRS may collect from you to the extent federal or state transferee liability law allows, for example for assets you received from the estate (Publication 971).

Letters after a death can arrive when a deadline is already running (2 years for innocent spouse and separation of liability, the collection period for equitable relief). Gather the letters, the joint returns, and the date of death before you reply.

Does it matter if I live in a community property state or filed separately?

Yes. Joint liability comes from filing jointly (26 U.S.C. 6013(d)(3)). If you filed separately, you generally answer for your own return, with an exception in community property states. A year already filed jointly cannot be switched to separate returns after the filing deadline, so relief for it comes through Form 8857 (26 CFR 1.6013-1(a)(1)).

The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (Form 8857 instructions). There, spouses are generally each entitled to half of community income, so a spouse who files separately can owe tax on income they never saw.

• Joint return in one of these states: you are both liable for the total, and state community property law is not used to decide whose item it is when you ask for relief.
• Separate return in one of these states: you may ask to be relieved of tax on an item of community income if you did not file jointly, left the item off your return, the item is treated as your spouse's under the tax code's community property rules (section 879(a)), you did not know and had no reason to know of it, and holding you liable would be unfair. Equitable relief is the other route.

The deadline for the community income route is much shorter: 6 months before the assessment period against the spouse ends.

What if the IRS says no?

You have three options, and the first two have short deadlines.

1. Appeal a preliminary determination. The IRS sends both spouses a preliminary determination letter (its first decision). Either spouse can appeal within 30 days of the letter's date by filing Form 12509, Innocent Spouse Statement of Disagreement, with the IRS address on the letter, not directly with the Independent Office of Appeals (IRS Appeals: Innocent spouse).
2. Petition the Tax Court. After the final determination letter, you may petition within 90 days of the mailing date. If no final letter arrives within 6 months of your request, you may petition anyway. A late petition cannot be reviewed, and the community-income route cannot go to Tax Court (Form 8857 instructions).
3. Arrange to pay what remains. The IRS offers short-term plans (180 days or less) and monthly installment agreements. An individual can apply online for a long-term plan if the combined tax, penalties and interest is $50,000 or less and all required returns are filed, and for a short-term plan under $100,000. Interest and penalties continue until the balance is paid. Unpaid tax can lead to a federal tax lien or levy; the IRS generally holds off enforced collection while a plan is being considered or is in effect (IRS: Payment plans).

Relief covers only the years you list. Each later joint return again makes both spouses liable for the whole tax (26 U.S.C. 6013(d)(3)). Filing separately limits you to your own return, community property states aside, but the tax itself can differ by filing status.

Is this the same as injured spouse relief, Form 8379?

No. Injured spouse relief gets back your share of a joint refund that the IRS applied to your spouse's past-due debts, such as child support, a student loan or other tax. Innocent spouse relief removes your liability for tax on the return itself, and Form 8379 cannot request it (Form 8857 instructions).

File Form 8379 within 3 years from the date the return was filed or 2 years from the date the tax was paid, whichever is later (IRS: Injured spouse relief). Some situations need both forms.

Example

These examples are illustrative. Amounts are in US dollars.

Hidden business income, four years

A wife signed joint returns for four years. Her husband's landscaping income was left off, and after an audit the IRS bills US$30,000 in tax, interest and penalties. She never saw his customer payments, did not know of the income, and none of that money went beyond normal household support. She lists all four years on one Form 8857, within the deadline that runs from the IRS's first collection step. She may qualify for innocent spouse relief on the understated tax, and for separation of liability once she is divorced, legally separated, or has lived apart from him for 12 months. The IRS decides each year on its own facts: if she kept the books in the fourth year, that year may fail the knowledge test while the first three do not.

Tax reported but never paid

A couple reports US$20,000 of tax on a joint return, and he never pays. That is unpaid tax, not understated tax, so only equitable relief applies. The IRS asks whether she reasonably expected him to pay, whether paying would leave her unable to meet basic living costs, who benefited, and whether she has filed and paid since. If the couple had asked for an installment agreement with a realistic plan within the window after the return, the IRS presumes she reasonably expected him to pay. Knowing about his earlier IRS problems generally weighs against her.

A widow finds old balances

A widow learns that four joint years carry unpaid balances.

The unpaid total is US$20,000, plus interest and penalties. The IRS can pursue her or the estate. Because the tax was reported, only equitable relief is open. Being widowed counts as no longer married unless she is an heir to an estate that could pay the tax. A balance-due request must come while the IRS can still collect each year, and the earliest-assessed year generally ends first (a suspension can change that). She lists all four on one Form 8857.

Different for you?

• An IRS letter names a joint year and the amount comes from your spouse's business, or your spouse has died and the debt just surfaced: which years and which relief fit, what the correct returns would have shown, and the Form 8857 deadline all depend on the facts. Get individual tax help before the deadline passes.
• The business's income and expenses for those years were never recorded, or the records are your spouse's or incomplete: separation of liability and a corrected return both rest on the real figures, so the books come first; see bookkeeping.
• The IRS sent a CP2000 for income that did not match: follow the CP2000 guide.
• Income was left off returns already filed: see amending for income left off past returns.
• Years were never filed: see catching up on unfiled returns.
• A preparer filed the returns wrong or never filed them: see a tax preparer filed a wrong return.
• The business owes payroll tax and a revenue officer wants to meet: see the trust fund recovery penalty guide and IRS notice to your business.
• Your spouse is a nonresident or lives abroad, and you filed jointly by choice: see married to a nonresident.
• You are the executor of your spouse's estate: see the executor guide.