Filed under: Audits, Business Expense, Gifting, Small Business Deductions, Taxes
If you give a gift as a part of your business it’s a deductible business expense. BUT! You can’t deduct more than $25 for gifts you give to a person during the tax year. This $25 limit has been in place for ages and hasn’t been adjusted for inflation for as long as I’ve been doing taxes. That makes keeping within the gift budget a little trickier every year.
I think some people do a lot of “fudging” on the gift expenses, but the IRS seems to be taking a closer look at everything these days so you need to know what you can and can’t deduct. And make sure you document everything and keep those gift receipts.
Here’s some real questions that people have asked me about deducting gifts on their tax returns.
What if I give two different gifts, like a birthday and a Christmas gift? Can I deduct $50 then?
No. Sadly, the $25 limit is on gifts for the entire year, not $25 per gift.
What if I give a $100 gift to my client’s family of four? Can I deduct the full expense?
No. Any gift you give to the customer’s family is considered to be an indirect gift to the customer. So unless you independently do business with each of the other family members, you may only deduct $25 for the gift.
My husband and I each own our own businesses and our businesses have some clients that overlap. Can we each deduct $25 for gifts to our overlapping clients? (Okay, nobody asked me this one, I saw it online and thought it was a good question.)
Surprisingly, No. Technically, a husband and wife are treated as one taxpayer and it doesn’t matter if you have separate businesses or separate employers. Partnership partners are also treated as one taxpayer when it comes to gifts as well.
I sent one of those holiday gift tins that cost $24.95. The extra Holiday message cost $1.95 and the shipping was $9.95 for a total of $36.85. Am I stuck only claiming the $25?
Actually, in your case, you can deduct the whole amount. The gift itself was under $25. You are allowed to deduct the incidental costs like shipping, wrapping or engraving on jewelry.
I gave my client two football tickets that cost $150 total. Am I stuck only claiming $25?
Anything that can be considered as entertainment can be deducted as an entertainment expense–even if you don’t go with the client. In this case, you could deduct $75–half of the entertainment expense.
If bought my daughter an IPad for Christmas. Since she sometimes does some work for me, can I write that off as a deductible business expense? (And yes, this was a real question.)
Ahem, really? Well, here’s the rules. An IPad counts as listed property. (Listed property is the cool stuff that might also make a good gift that the IRS looks at much more carefully than other business expenses.) Business use of listed property is not included in employee wages. Non-business use of the listed property is included in the employee’s wages and taxed accordingly. But you’ve got to substantiate it–and–if you don’t substantiate it, then the entire cost of the IPad is going to have to show up in your daughter’s wages. (By the way, since she does supposedly work for you, you are issuing her a W2 for her wages right? If you don’t issue a W2–then claiming she works for you probably isn’t going to pass muster with the IRS.)
Remember, small incidental gifts valued at less than $4 with your logo on it don’t count as a “gift” towards that $25 total. If you’ve been giving away mugs and pens for advertising, don’t worry–those are still 100% deductible.
Filed under: Business Taxes, High Income Earners, Individual Taxes, IRA, Tax Preparation, Tax Preparers, Tax Tips, Taxes
Today I want to talk about tax planning, and why it’s so important.
I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special. She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first. So she called me.
Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined. Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole. Then we started talking.
You see, she didn’t need to make the purchase right away, she was just thinking about it. So I decided to see what would happen if we split the $30,000 between 2013 and 2014, $15,000 each year. What a difference! Instead of paying over $9000, she’ pay $688 per year total for her state and federal income taxes combined. That wasn’t a typo–six hundred and eighty-eight dollars a year. $1376 total tax for a savings of over $8000!
So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000. How cool is that?
In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well. For many people, splitting up the IRA withdrawal would not save them any taxes at all. But my point is–how do you know? By taking the time to ask–she saved $8000.
What’s going on in your life that could benefit from a little tax planning? Selling some stocks or mutual funds? Donating to charity? Do you own a small
business? Are you getting married? Getting divorced? Having a baby? Getting a new job? Buying a home? Any of these events, and many more, could use
a little tax planning.
My business card says, “If you don’t have a tax strategy, you’re probably paying too much.” It’s true. So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes. Why would you want to give the IRS more money then you need to? It’s not rocket science, it’s just common sense. The best way to keep more of your money is to make a plan for keeping it. Call me. I can help.
If you normally use your income tax refund to pay for your Christmas presents, listen up. You’ve got a problem.
First, nobody is doing Christmas loans. Remember when H&R Block and Jackson Hewitt used to provide loans against your refund? Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans. A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between. Most people had to wait for two to three weeks to get their refund.
Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21st like they had previously announced—they won’t accept returns until January 28th, and maybe not until February 4th.
What does this have to do with Christmas? Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest. If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.
So what other options do you have? For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck. If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents. If it’s already December by the time you see this—it’s probably too late.
Here’s something else you need to know. If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return. You might think that you’re filing on January 3 or 4th, but you’re not. What they’re doing is “stockpiling” your return. They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.
Why is that important to know? Because people think that they need to file early to get their refunds. But those early returns are often wrong. They’re missing information, or the software’s not fully functional yet. The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies. If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back. It’s too late. And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.
There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts. But you know what? Christmas comes every year. Every year! Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash. Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas. Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.
Wait right there. I can hear you through the computer. “How stupid does she think we are?” “Who doesn’t know how to put their name on a tax return?” “I’m not a moron you know.”
Yes, I know you’re not a moron. (And no, I can’t really hear you through the computer, I’ve just dealt with this issue enough that I know what people generally say.) For 99.9% of you, you put your name on the tax return and that’s it—no problem. But there’s always that small number of people every year whose tax return gets rejected because, according to the IRS, their name is wrong. This is about fixing those returns.
Number 1: Often when you get an IRS “name error” message, it’s not your name that’s the problem at all. It’s your social security number. Check that first to make sure you didn’t transpose a number. If that’s the problem, you may need to re-input your whole tax return. My current software lets me correct a bad SSN, but I used to use one that made you do the whole return over. That’s not fun.
Number 2: You didn’t change your new married name with the Social Security office. Many women get married and change their names. They tell their friends, they tell their work, but they forget to do it officially with Social Security. When they file their tax return with their new married name—reject! They don’t exist. You’ll need to file the return with your old name on it. You can still do file as married, you’ll just use your maiden name. Then go to Social Security and give them the new name. Here’s information on how to do that: http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/315/session/L3RpbWUvMTM4Mjc5MzQ0Ny9zaWQvKkRTVzFNRGw%3D
Although it will only take about 10 days to get your new social security card, it will take about 8 weeks to get your name into the federal computer system. If you’re looking for a refund, or have a filing deadline, just use your old name for now and the new name next year.
Number 3: You really spelled your name wrong. You’d be surprised how easy this is. We double check our numbers –of course, it’s taxes. But we don’t double check spelling our names. Why would we, it’s our name? We know that. But you know how it goes, “tiye dubfwea di ib rgw qeibf jwta”. I mean, your fingers go on the wrong keys.
Number 4: If you’ve double checked your SSN, and your name is spelled correctly and you’re not recently married and you’re still getting a reject notice—you’ve got to pull out your actual social security card as see what it says. On newer social security cards, the last name is printed under the first and middle names. For example, Hillary Clinton’s return might be getting rejected because it should really say Hillary Rodham Clinton on it.
Number 5: It’s wrong at the IRS. It’s possible. If you’ve checked everything on this list, including pulling out the actual SS card and checking everything and you still have the “wrong” name, you can still paper file the tax return, just to get it submitted. You’ll still want to follow up with the IRS and Social Security and get your name fixed. If you’ve filed returns before, you can get a transcript of your old return from the IRS. Your transcript will have the name that the IRS has for you on it. Here’s a link for that: http://www.irs.gov/Individuals/Order-a-Transcript I know that sounds a little crazy, and even impossible, but I had to do that to once. Well, I knew the person’s name, but the IRS had something completely different!
One final name issue for people who paper file their tax returns: don’t forget to put your name on the tax return. Really! It’s one of the most common mistakes. People who e-file—you can’t forget to do that. People who paper file, they often do all of the math and plan on adding their name last. Then they finish their return and forget to put the name on. Back in the Stone Age when I was taking the income tax prep class, it was an automatic failing grade to not put a name on the return. I thought it was silly (they were fake names on fake returns!)
If you file a tax return with no name on it, then that means it’s not filed. If you don’t file your tax return on time, there’s a penalty of 5% per month of the tax you owe, up to 25%. If you’re expecting a refund, it won’t come. These returns just go into the trash. And yes, this still really does happen. I’ve had people come to my office with IRS letters telling the people they never filed. The taxpayer shows me the photo copies of his mailed tax return to prove he filed and right there in black and white is a blank space for the name. It’s a really easy mistake to make. It happens quite often (or I wouldn’t bother to write about it.)
***Roberg Tax Solutions congratulates the St. Louis Cardinals for making the 2013 World Series. We have been having “Cardinal Apparel Day” every day this week. As of now, the series is 1-1, game 2 was a Cardinals 4-2 win, and we are back on track after game 1’s ugly loss.
Let’s face it—this is the long lost question in the world of tax preparation. You probably have a better chance of Miley Cyrus stealing your “Go Cardinals!” foam finger than you do of being asked about this inquiry. This does not mean that people aren’t checking the box however. In 2012, there has been about $37 million contributed up to July with a total fund balance of about $232 million. Not a bad chunk of change. During my time in the Volunteer Income Tax Assistance Program—commonly referred to as VITA—other volunteers and I routinely asked the question because it was part of our standard operating procedure. I am not sure if the mainstream brick and mortar tax firms ask the question but I bet Jan knows.
Anyways, my point in this brief writing is to inform you about this tiny section of the 1040 series—the who, what, why, when, how, etc. of the presidential election fund or at least point you in the direction of knowing those questions.
2012 Form 1040 instructions page 12 states verbatim:
“This fund helps pay for Presidential election campaigns. The fund reduces candidates’ dependence on large contributions from individuals and groups and places candidates on an equal financial footing in the general election. If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund will not change.”
It is important to understand that that checking this box will not change your tax or refund. So what is actually happening? It means that you want $3 of tax dollars you already owe to the government to go towards the Presidential Election Campaign Fund (PECF). When you check the box, the government has to allocate that $3 into the PECF. So there is no tax incentive to check or not check this box. This is a valid reason for self research about the fund to make a well informed decision and to support your reasons for doing so.
In 1975, the Federal Election Commission (FEC) was born to oversee the Federal Election Campaign Act (FECA). This is the law that governs the financing of federal elections. Obligations of this independent agency include the divulgence of campaign finance information, enforce limits and prohibitions on contributions, and become the all seeing eye of Presidential election public funding.
Furthermore, the agency is made up of six members that of which are appointed by the President of the United States and contingent upon Senate approval. Each member serves a six year term. Stated precisely from http://www.fec.gov/about.shtml, “By law, no more than three Commissioners can be members of the same political party, and at least four votes are required for any official Commission action. This structure was created to encourage nonpartisan decisions.”
It was that the check box used to be $1 dollar but increased to $3 in 1994 by Congress. Extensive detail about the $3 check off can be found at http://www.fec.gov/pages/brochures/checkoff.shtml. The information is well put, easy to read, and concise.
The Federal Election Commission has charted the Fund since its 1976 inception. The most recent chart can be found here: http://www.fec.gov/press/bkgnd/pres_cf/PresidentialFundStatus_September2012.pdf.
If the candidates decide to use the fund money, they must agree to a spending limit. In the 2012 election, neither Barack Obama nor Mitt Romney used the Presidential Election Fund resulting in a very expensive election.
People often ask me about deducting job search expenses on their tax returns. Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!” While this is true that job search expenses can be deductible—many times, they really aren’t.
For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation. I do taxes; I’m in the accounting field. If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting. (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)
But say you truly are looking for a new job in your field, what can you deduct? Here’s a pretty good list:
- Employment and job placement agency fees
- Cost of preparing and mailing copies of your resume
- Travel expenses to look for a new job, but only if the trip is primarily to look for a job. (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
- You can deduct your job search expenses even if you do not find a new job
After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A. That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count. And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.
Here’s an example: Christie is an office manager for a small law firm and makes $50,000 a year. She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job. Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses. In this case, Christies total job search expenses were $2,600.
Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.) So in this case, Christie would have a miscellaneous deduction of $1,600. ($2,600 expenses – $1,000 threshold = $1,600.) So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses. If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.
You cannot deduct your job search expenses if you are looking for a job for the first time. This rule keeps most recent grads from claiming job search expenses.
Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job. If your resume needs help, hire a resume writer. If a placement agency can help you, use one. Be sure to put your best foot forward.
For some good free advice about job hunting, check out this website from BestCollegesOnline.com. Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out. Face it, when you don’t have a job, free is a pretty good price. Here’s a link: http://www.bestcollegesonline.com/career-skills-learn-school/
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea. Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.” Basically, money is worth more now than it is later. This idea would not exist however, if there was no concept of “interest”.
There are two types of interest – simple and compound. Simple interest is interest paid on a beginning principal balance only. If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph. Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time. On a graph compound interest appears with a geometric (or exponential) growth pattern.
The present value of a future sum is the core formula for the time value of money. All time value of money equations are based off this formula so it is extremely important to review. It is expressed as such:
PV = FV / (1 + i)^n
PV = Present Value
FV = Future Value
i = interest rate
n = number of periods
The future value of a present sum is expressed as FV = PV * (1 + i) ^n. We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.
So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?
Retirement Planning: We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half. This is because Susie’s IRA endured 14 more years of compounding. The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision. With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions. If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally. Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?
Tax Planning: Accelerate deductions, postponing income recognition. This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow. By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due. Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years. The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does. Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.
Investment Planning: Younger people can be more aggressive because they have more time to make up for their losses. A younger person’s portfolio can afford more risky securities such as stocks. As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.
With time value of money, the uncertainty of the interest variable is the most difficult to tame. Those who can predict its patterns the best, tend to make the most money.
I see a lot of internet questions about flat taxes and progressive taxes. It seemed that since I do a tax blog, it was time to tackle those basic questions.
A flat tax is a tax that is the same for everyone, under all circumstances. A good example of a flat tax is the sales tax rate. It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage. Some cities have a flat income tax. For example: The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits. It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.
A progressive tax increases as your income goes up. This is what our current federal tax code is like. For a single person, the first $9,750 isn’t even taxed. Then the next $8,700 is taxed at 10%, the next $26,650 is taxed at 15%, the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.
Those rates change if you’re married or filing as head of household. I’m not going to post all the tax rates here. If you want to look, check out the tax rate tables at the IRS website: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.
Tax Incentives are tax rules that are intended to influence behavior. Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.
There’s been a lot of talk about changing the tax code. Right now, we have a progressive tax code with lots of tax incentives. Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas. There will be lots of pressure on our representatives to keep the tax loopholes. The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years. http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years
The tax code has nearly doubled in length over the past two years. If I had any say in the voting, I’d like to see the tax code made easier. Yes, a difficult tax code keeps me employed, but I can live with the consequences. I think a simplified tax code is good for the country.
What changes would you make? What deductions do we really need, if any? What needs to go? Post your answers, I’m curious. Your post won’t show up immediately. My site has a delay to screen for spam. You wouldn’t believe what kind of weird comments there’d be without it. But if you make a post, it will show up within a day or two. Thanks.
Update: I posted this blog on Tuesday morning, August 6. Tuesday evening I saw this segment on The Daily Show. I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length. http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes
What do you do when you file an amended tax return but you haven’t heard back from the IRS? Well now you have access to an online tracking tool to let you know what’s happening. It’s called “Where’s My Amended Return?” Okay, so the IRS isn’t so great at catchy names, but that’s probably what you’d type into Google if you were researching it right?
And the best part is, it’s not that difficult to use. Here’s a link to get you there: http://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1
If you don’t want to do this on the internet, you can always call them. The number to follow up on an amended return is: 866-464-2050. That is a toll-free number, I recommend not calling when you can click the link and get the information much faster. Save calling the IRS for those times when you absolutely need to.
In order to access the amended return information (whether you call or use the internet) you’re going to need to provide the following information: social security number (if you’re married filing jointly you’ll need the social of the primary taxpayer–the primary is the person whose name is on the top, not necessarily the one who makes the most money. You’ll also need your of birth (or the primary’s) and your zip code.
The “Where’s My Amended Return?” website will only access information on 1040Xs for the current three eligible years. If you amended old tax returns or you have Net Operating Loss Carry-backs–this website won’t have any information for you, you’ll have to call the IRS directly for that information.
While this new web tool is good for most returns, there are a few other things you won’t be able to get information on: injured spouse claims, returns with foreign addresses, and business returns are not available here. Also, if your amended return was re-routed because of some special circumstance; such as you amended your return because of a CP2000 notice (that’s one of those IRS nasty little ‘whoopsie we think you made a mistake’ letters.)
Even though there are many types of returns that aren’t listed in the “Where’s My Amended Return” website, it’s the best place to start. Any time you can get an answer from the IRS without having to actually call and wait on hold it’s a good thing.
Generally, you’ll have to wait at least three weeks before you can access information from the “Where’s My Amended Return?” website. Most amended returns take 12 weeks to process and some can take even longer. If you’re looking for a refund, think in terms of waiting at least three months before you’ll see the money.
Of course, if you owe, you should pay right away, because the debt will back date to the date the original return was due and the IRS will start charging you penalties and interest from that point in time. For what it’s worth, they do pay you interest if you have a refund coming.
Amended returns are not the fastest thing happening at the IRS, but at least now you have a tool for tracking them.
Innocent Spouse and Injured Spouse are two terms that often get confused when people are looking at IRS issues. You are an injured spouse if the IRS takes your tax refund to pay for a debt that is owed by your spouse. You may be able to retrieve some (if not all) of that money by filing an injured spouse claim. For more information on that see Injured Spouse Relief: http://robergtaxsolutions.com/2011/03/injured-spouse-relief/
Innocent Spouse is where your spouse (or rather ex-spouse) has done something where there is tax liability for which you don’t have any responsibility for. Let me give you an example:
Abusive spouse is running around and gambling behind your back. You’re living in a hovel while spouse is living large, playing at the casino and spending money on fancy hotels and alcohol. You finally escape the situation and divorce bad spouse only to find that the IRS is after you for spouse’s tax debt from the gambling winnings. You had no knowledge of the money, and the spouse was forging your signature on the tax returns. This is where you would file for innocent spouse relief.
It used to be that you had to file an innocent spouse claim within two years of the actual tax return. Most innocent spouses weren’t able to file that quickly. It often takes longer than that to realize there’s a problem, or get out of an abusive situation. Fortunately, the IRS realized that and they’ve eliminated the two year rule. If you have applied for innocent spouse relief before and were denied because of the two-year rule, you may re-apply.
There are three types of Innocent Spouse Relief:
Innocent Spouse Relief – you filed a joint return and there is understated tax that is due to erroneous items like unreported income or unsubstantiated deductions, and you had no knowledge of these things. (Example, you get an audit letter about income your ex had that you had no knowledge of.)
Separation of Liability Relief – this is where an unpaid tax liability is divided between you and your ex-spouse for taxes that were filed while together. No refunds are granted in this case, only a separation of liability for unpaid taxes. (You get divorced and you agree that you will pay $X amount of tax which was your responsibility and your ex will pay $Y amount. You pay your share and your ex doesn’t so the IRS goes after you for the tax money. This is a good time to file for Separation of Liability Relief.)
Equitable Relief – if you don’t qualify under one of the above categories but it would be grossly unfair to force you to pay the tax, like in the abusive spouse example above.
A couple of other general things you need to know. First, you can’t have transferred assets or done anything fraudulently try to avoid paying taxes. You either had to not know about the tax owed or you were forced to sign documents against your will. Often, there is some type of abuse in these innocent spouse cases, you will be required to substantiate that. This isn’t an easy process. The worst part is if you file for Innocent Spouse Relief, your ex will be informed. If you are the victim of an abuser, you need to make sure that you are physically safe before you file this type of claim.
To explore if you might qualify for Innocent Spouse Relief, try this interactive questionnaire on the IRS website: http://www.irs.gov/Individuals/Explore-if-you-are-an-Eligible-Innocent-Spouse
Here’s the form that you file for Innocent Spouse Relief: http://www.irs.gov/pub/irs-pdf/f8857.pdf
You file this separately; it does not go with your tax return. It gets mailed to
Internal Revenue Service
PO Box 120053
Covington, KY 41012
You may fax the Form 8857 and attachments to the IRS at 855-233-8558.
Make sure that you put your social security number on every page of the attachments.