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What Is Form 8857 and How Do I Qualify?

It wouldn’t be an understatement to say that the IRS has hundreds of forms and hundreds of different formatted letters and notices it sends out each year. Keeping up with every form is an impossibility, especially for a layperson. However, a few forms are infamous and will sound recognizable, such as Form 1040 and Form W-2. Form 8857 is not one of these recognizable forms – but it is one of the most critical tax forms you will ever fill out, especially if the IRS is threatening you with a sizeable tax debt you know next to nothing about. That is because Form 8857 is the Request for Innocent Spouse Relief form.

Understanding Form 8857

Form 8857 is needed whenever a taxpayer wishes to apply for Innocent Spouse Relief. Innocent Spouse Relief is, in a nutshell, a request sent to the IRS to remove a person’s tax liability because they were not involved in whatever led to their joint tax debt on a married account. Taxes can be filed in several ways, determining your filing status. If you are single, you file as an individual. If you live in a larger household, you can file as the head of said household (with some greater tax benefits) and claim your dependents. If you are married, you can file jointly, in which case only one tax return will be filed for both of you, and your tax advantages are pooled together as a couple.

This is useful as it means double the deduction, even if one of you earns less or doesn’t have an income, to begin with. But with the ability to file jointly comes the risk of becoming liable for an outstanding tax balance. In other words, if you owe back taxes, you will owe them together. There are ways out of this if you have sufficient proof that you had no way of knowing about the root cause of your back taxes and that you effectively aren’t involved. This, in turn, would qualify you for innocent spouse relief. But it isn’t quite as simple as walking up to the IRS and claiming it was all your spouse’s fault. You will need something a little more substantial.

Qualifying for Innocent Spouse Relief

Innocent Spouse Relief is quite comprehensive. If you qualify, the IRS may relieve you of all responsibilities regarding the outstanding tax debt and any interest and penalties. But to qualify, you must meet all of the following requirements:

  1. The offending tax return was jointly filed, and all understatement of taxes owed was due to erroneous items listed by your spouse.
  2. There is established evidence that you did not know or had no reason to know that there was an understatement of tax, per the IRS’s understanding of Actual Knowledge and Reason to Know.
  3. The IRS determines that, based on all facts provided, it would be unreasonable and unfair to hold you liable for the taxes owed. This is defined as per the IRS’ rules on Indications of Unfairness.
  4. You and your spouse must not have been involved in a fraudulent scheme and must not have passed property between each other as part of a scheme to defraud the IRS, another creditor, or any other third party.

The IRS’ definition of an erroneous item is also important here. For Innocent Spouse Relief to work, you will need evidence that your spouse was responsible for the erroneous item that led to your joint debt. This may include either:

  • A significant amount of unreported income.
  • An incorrect tax credit, tax deduction, or property basis (capital gains taxes).

Both are relatively simple and self-explanatory. Unreported income may range from thousands of dollars in cash-only tips to income from a side business. An incorrect tax credit is a credit you do not apply for, such as a credit on a dependent you do not house. An incorrect tax deduction may include a deduction for money spent on an ad campaign that was never actually spent or money reportedly spent on business expenses but on veterinary costs.

An incorrect property basis involves misconstruing or miscalculating the taxes owed on the sale of a property by estimating its base as higher than it originally was (to minimize taxes owed on capital gains due to an increase in property value). You might start to see how you can prove that you weren’t involved in whatever led to the erroneous tax estimate. For example, if the erroneous item was part of your spouse’s business – in which you are not involved – then you have a good case. If you work together, it’s harder to argue that you have no way of knowing. This brings us to:

Actual Knowledge or Reason to Know

If the IRS deems that a reasonable person in your shoes would have known about the erroneous item that caused the debt – such as knowing that the ad money didn’t go towards ads – you will not qualify for relief for that item. If multiple erroneous items are involved, you can still seek Innocent Spouse Relief for as many items as you weren’t involved with – the IRS will calculate what you ultimately owe after reviewing Form 8857. Circumstances the IRS considers when weighing whether you should have known include:

  • The nature of the item (does it pertain specifically to something only your spouse would have intimate knowledge of?).
  • Your financial situation (between both you and your spouse).
  • Whether you benefit from the erroneous item personally.
  • Your personal experience in business and your educational background.
  • Whether it would have been reasonable to ask questions about the return before its filing, which would have revealed the erroneous item.
  • Whether the erroneous item was usually reported but was suspiciously omitted this year.

Indications of Unfairness

Given the information you can provide about your background and your financial information, the IRS will take into account the facts of the situation and determine unfairness towards you based on the following:

  • Whether you were deserted.
  • Whether you have been recently separated.
  • Whether you stand to benefit significantly from the erroneous item.

The Bottom Line

Innocent Spouse Relief may relieve you of all or part of your tax debt, depending on your involvement in the erroneous item(s) identified on your joint tax return. Without concrete proof, the IRS will decide based on what a “reasonable person” would do. Because this can be a delicate tax matterpersonal legal representation is highly advised. Not only can a lawyer help you fill out Form 8857 with as many positive details as possible, but they can also help you file an appeal if the IRS does continue to pursue your liability in the tax debt. If you do not qualify for Innocent Spouse Relief, you may still be eligible for Equitable Relief.

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