If you and your former spouse have previous joint returns with tax deficiencies, you’re at risk of incurring tax debt that doesn’t actually belong to you. If your former spouse made an error on a joint return, either intentionally or accidentally, and the IRS is imposing additional tax debt, you want to make sure you’re not the one having to pay for the other person’s mistake.
If your former spouse incurs an understatement, meaning they underreported income or claimed an improper deduction, the IRS will absolve you of the debt stemming from their error—only if you didn’t know about it. If the IRS can prove you had actual knowledge of the error when you signed the return, you’ll be responsible for the resulting tax debt even if it belongs to the other person. So, what exactly does “actual knowledge” mean?
How Does the IRS Define “Actual Knowledge”?
The IRS uses Separation of Liability Relief to free you of a former spouse’s tax liability on a joint return. However, if the IRS can show you had actual knowledge of the unreported income or error in question, then the IRS won’t let you off the hook.
The IRS defines “actual knowledge” as direct awareness, meaning you knew your former spouse earned unreported income or claimed an unallowable deduction or false expense. The IRS has to show that you knew about the specific error, not just that you “should have” noticed it.
According to the IRS Separation of Liability Relief Guide, you had actual knowledge if:
- You knew your former spouse omitted income from the return.
- You knew that a credit or deduction was improper or incorrect.
- You intentionally avoided learning about a taxable item on the return.
- The tax stems from property you and your former spouse own together.
If the IRS claims you had actual knowledge of the error, you have grounds for an exception if you can prove you signed the return under duress. For instance, in a case of domestic abuse, you might fear retaliation or feel forced to sign. In this case, the IRS may forgive your actual knowledge.
Highland Tax Group Can Help You Avoid Trouble on Previously Filed Joint Returns
Facing a tax deficiency on a joint return with a former spouse can leave you vulnerable to tax debt that shouldn’t be yours. The experts at Highland Tax Group can help you avoid unnecessary tax liability, especially in the precarious situation of joint returns with former spouses.