IRS Audit Red Flags: Understand Who & When the IRS Audits

IRS red flags are another name for the Discriminant Function System (DIF) used by the IRS to generate a tax return score. The higher the DIF score, the more likely it is for the tax return to be audited. While it is not known exactly how the IRS computer system works, many tax professionals do know which factors the IRS weighs more than others. The IRS actually uses three different computer systems to check for different types of red flags.

Some red flags don’t always lead to an audit, they are all considered by the computer program and weighted together to determine if the return should be audited. Pretty much what the computers do is a complex statistical analysis of each tax return and if the return falls outside of statistical norms then it will likely be flagged. Most of the time when the IRS computer has flagged a return it will be manually reviewed by an IRS employee to determine if the return should be audited.

Individuals and small businesses both have different red flags because of the difference in the nature of both. Below are the most common individual tax return red flags and most common small business tax return red flags.

Individual Tax Return Red Flags

These are the most common red flags for personal tax returns.

1. Rounded numbers: The likelihood of your investment earnings or your mortgage interest being a rounded number is very unlikely. The IRS knows that if numbers are rounded there is a higher chance that the person filling out the tax return is not using actual numbers. Don’t panic if you do see that your investments actually came out to a straight $1,000.00, normally a flag won’t be triggered unless there are a few instances of rounded numbers.
2. Unreported income: If you fail to report income the IRS will catch this through their matching process. It is required that third parties report taxpayer income to the IRS, such as employers, banks, and brokerage firms. If the IRS notices that a third party reported that they paid you income but you don’t have that income reported on your return this immediately lifts a red flag.
3. Sloppy or incomplete information: One of the biggest red flags is if the tax return has math errors or is not complete. It is always smart to use tax software that checks everything electronically, these can be some of the easiest errors to avoid.
4. Charitable donations: Charitable donations are great but the IRS has found that many abuse this deduction, which is why the IRS will look into many large charitable donations. The IRS knows what the average charitable donation amount is for someone of your income bracket and if you donate more than the average this will raise a red flag. If you are a generous person, just be sure to keep all records of the transactions to prove to the IRS if they ask.
5. Earning over 100K: The IRS likes to focus their efforts on the individuals that they can justify the expense of the audit. Individuals that make over $100,000 are 500% more likely to get audited than people making under that. This is one of those flags that you cannot help, it is just a fact that the IRS audits people with higher incomes at a much higher rate.
6. Low-income profession: The IRS computer knows what someone of your profession and location makes on average. If you report a number that is significantly lower than what the IRS would expect then that could be a red flag. If you get audited for this reason and reported everything correctly, then it is probably time for you to request a raise.
7. Differences in Federal and State tax returns: If there are differences in what is reported on each of these, you can expect red flags to go up for the IRS and for the State. Be sure these are consistent, using tax preparation software can help with this, and make sure there are no differences when you file.
8. Large swings in income: The IRS thinks that there should be consistency to earnings. If there are large swings of reported income that cannot be explained by W-2s or 1099’s, this is a red flag. This is another one of those red flags you can’t avoid if you do have large swings in income. If you do expect to have large swings, just be prepared to show documentation for the differences.
9. Job Expenses: Typically most people cannot take job expense deductions if they are a W-2 employee. There are cases that this is allowed if certain conditions are met. The IRS knows that not many people actually meet these conditions and far more people take the deduction than actually qualify to take it, therefore it is a red flag to take job expense deductions if you are a W-2 employee.
10. Tax avoidance transactions: Sometimes there are incriminating documents that are turned over to the IRS from the IRS’s efforts to identify participants in tax avoidance transactions. This can happen when the IRS gets the courts to companies that are promoters of tax avoidance schemes to hand over documents related to these transactions. These transactions can point out individuals that have taken part in tax avoidance transactions.

Small Business/Self Employed Tax Return Red Flags

These are the most common red flags for small business/self-employed tax returns.

1. Home Office Deductions: Since the IRS has allowed home office deductions they have been abused. There are many cases where these are legitimate deductions but many times people do overstate them or misuse them, which is why the IRS investigates these types of deductions more than any other. Typically the IRS will look at your profession and prior tax filings as well to determine how much weight to put on this red flag. If you are taking a home office deduction and it is legitimate, be sure to have the proper backup to support it if any questions do arise.
2. Filing a Schedule C: Studies have shown that people that file a Schedule C are much more likely to get audited than individuals that don’t. If you do file a schedule C, be sure to have all the documentation to back up your deductions that you have taken. You can also consider forming a separate business entity (LLC, S Corp, Corporation) and flowing expenses through there instead of a Schedule C.
3. Entertainment deductions: This deduction has been abused quite a bit in the past and many people try to get away with putting too many entertainment or business meal expenses on the business when most are not allowed. This will raise a red flag if the amount charged seems too large compared to the business size.
4. Losses reported from hobby instead of business venture: The tax code does not permit individuals to deduct hobby expenses on their tax return. If you have claimed expenses on a Schedule C that show a loss the IRS may look into this further because it looks like you could be flowing through hobby losses as a business loss. The IRS will require you to prove that this is a legitimate business if they audit you for this reason.
5. Low Income with large deductions: Many times when small businesses report low income and large deductions they tend to be claiming more than is actually allowed. While this could be legitimate, especially for newly formed companies or companies having not so great years, the IRS may look into this further.
6. Claiming a loss on the business: Claiming a loss on a business is a red flag right away because this means that no taxes will be paid on the businesses and the IRS thinks that you may take deductions that are not allowed in order to pay any taxes. As you can see there is a common theme going on with red flags and small businesses.

If your tax return has audit red flags it doesn’t mean that you have done something wrong, many times your return is perfectly fine, but statistically speaking from the IRS perspective it is in their best interest to investigate a bit further. Being aware of common IRS audit red flags can help you make sure you keep proper documentation on items the IRS does consider as flags.

If you are looking for a licensed tax professional to help with a tax audit, review this list of tax professionals who have experience resolving IRS audits or start a search below and click "audit or examination" using the filter on the search page called "IRS Problem Experience."

IRS Audit Statute of Limitations: Years Back IRS Audits Tax Returns

The statute of limitations on how far back the IRS can audit (called the Assessment Statute Expiration Date or ASED) varies depending upon the circumstances of the tax return. In most cases the IRS will not go back more than 3 years unless there is something very wrong with the tax return that was filed. The statute of limitations starts on the original due date of the tax return. If the tax return was filed prior to the due date it doesn’t matter, the statute of limitations starts on April 15th of the year that the tax return was due. Below are the three different time frames the IRS can audit and descriptions of when each applies.

• 3 Year Period: This is the standard amount of time that the IRS has to legally audit most tax returns. This is the time period that applies if you do not fall into any of the two categories listed below.
• 6 Year Period: If the income on the tax return was understated income by 25% or more the statute of limitations to audit the return can be extended by another 3 years.
• Unlimited Time Period: If the tax return was filed with the intent to commit fraud then the statute of limitations can be extended to forever. There is a fine line between fraud and negligence and this only applies to tax fraud. The IRS must prove fraud in these types of cases and typically will only do this if a lot of money is involved or it is a high-profile tax case.

The statute of limitations on unfiled returns is effectively six years, but it can actually be unlimited in some cases. As indicated above, the rules can vary depending on the situation. Once the taxes have been assessed, the collection statute of limitations comes into play. The IRS has 10 years to collect assessed tax debt.

When You Will Likely Receive an IRS Notice

Since tax audits take time and the IRS does realize that they are slow, they try to get audits out as soon as possible. The IRS sends a variety of notices to alert taxpayers of a potential audit, these are the details on a few of the audit notices. As soon as possible for the IRS is typically around 12 months to 18 months after the tax return is filed, sometimes sooner. The IRS likes to give themselves 1-2 years to complete the audit because they realize that they can run into many delays along the way. They try to factor in a lengthy audit process and a 6-8 month appeal process. If the IRS does not complete the audit within 3 years of the due date for the tax return then the taxpayer cannot be held liable for any additional taxes owed (unless fraud exists or income was under reported by 25% or more).

Typically if you do not receive an audit notice within one and a half years after you filed your return it is unlikely that you will get audited. It is not in the best interest of the IRS to go after people more than 18 months prior to the return being filed because they run the risks of having a lot of audits go past the statute of limitations and their audit efforts would not pay off as much.

If you are looking for help with a tax audit, review this list of tax professionals who have experience resolving IRS audits or start a search below and click "audit or examination" using the filters on the search page under "problem experience."

IRS Failure To Pay Penalty: What to Know

If you don’t pay your taxes on time, in full, or at all, the IRS will assess a failure-to-pay penalty (FTP). Many people in this situation are scared to contact the IRS, or they decide not to file the tax return after finding out what they owe. This is not a good idea. There are serious consequences for unfiled or delinquent tax returns.

Remember, the IRS wants to work with you. If you set up a payment arrangement, the IRS cuts the FTP penalty in half. If you cannot afford a payment plan with the IRS, there are other options to consider.

When Does the IRS Charge the Failure to Pay Penalty?

The IRS assesses the failure-to-pay penalty anytime you pay your taxes late. A late payment refers to one that is after the regular due date. Remember, filing an extension, does not extend any payment due date, only the filing one. This penalty applies the very first day your taxes are late (generally after April 15th), and the IRS assesses this penalty monthly up to a maximum of 25% of the total tax owed or until the tax is paid in full.

How Much is the IRS Failure to Pay Penalty?

The FTP penalty ranges between 0.25% to 1% of the unpaid or outstanding tax amount. For example, if you owe $5,000, and your penalty is 1%, that equates to $50 for the month. Ultimately, the total FTP charges can amount to up to 25% of your balance.

The standard FTP penalty is 0.5% a month. If the IRS issues an intent to levy notice and you don’t respond, the penalty increases to 1% after ten days. If you enter into an installment agreement, this IRS tax penalty falls to 0.25% a month.

What’s the Difference Between the Failure-to-Pay and the Failure-to-File Penalty?

If you do not file your taxes, the IRS charges a failure-to-file penalty (FTF). The FTF penalty is 5% of your balance per month up to a max of 25% of your unpaid taxes. The IRS waives the failure-to-pay penalty in any month where the failure-to-file penalty applies. Five percent is the maximum amount the IRS charges when these two penalties occur in the same month. However, if fraud is involved, the penalties are higher.

How Is the FTP Different Than an Underpayment Penalty?

The IRS assesses the FTP penalty when taxes assessed remain unpaid after the payment due date. Generally, when you hear the term, “underpayment penalty,” this refers to taxpayers who failed to make estimated tax payments or didn’t pay enough in estimated taxes throughout the year. The IRS requires taxpayers who do not have sufficient holdings throughout the year to make estimated tax payments or face an underpayment penalty. You can avoid the underpayment penalty if:

• You owe the IRS $1000 or less after subtracting estimated tax payments and/or withholdings you had during the year
• If the IRS has 90% of what you owe for the current year, or 100% of what you owed for the previous year, whichever is smaller
• Note: The 100% in the former rule becomes 110% if your adjusted gross income is $150,000 or more ($75,000 if married filing separate)

What Is the Interest on Unpaid or Underpaid Taxes?

In addition to penalties, the IRS assesses interest on all unpaid taxes owed. The interest rate can change every three months, and it is the federal short-term rate plus an additional 3%.  As of 2017, the federal short-term rate fluctuated between 0.98 and 1.29%. That makes the interest rate on unpaid taxes between 3.98 and 4.29%, but it can be higher than that in some years. You can find the Applicable Federal Rates here.

The interest on unpaid taxes compounds. That means that once interest and penalties accrue, the interest gets assessed on those amounts as well as on the original tax owed.

Removing the Failure to Pay or Late Payment Penalty

The IRS offers penalty abatement for some taxpayers. In fact, first-time penalty abatement is available for the first year you incur the FTP penalty.  To qualify, you must be late for the first time, or you must show the IRS that you had “reasonable cause” to pay late. The IRS accepts a wide range of reasons, and the agency handles each situation on a case-by-case basis. If you would like to read more about this, the IRS offers a publication reviewing penalties.

What If You Can’t Pay the IRS in Full?

If you cannot pay the IRS in full, there are a wide range of solutions for you. Setting up a payment arrangement with the IRS you can afford is one way to avoid enforced collections with the IRS. Furthermore, it also cuts the failure-to-pay penalty in half. If you have financial issues, you can look into obtaining a hardship status from the IRS or apply for an Offer in Compromise. Whatever the case, it is always a good idea to consult with a licensed tax professional. You can find one by going here. 

IRS Taxes and Chapter 7 Bankruptcy Requirements & Details

Chapter 7 applies to individuals who cannot make consistent monthly liability payments regardless if the individual is solvent or insolvent. With a Chapter 7 bankruptcy, you can discharge some taxes, but first, you need to liquidate your non-exempt assets. The definition of non-exempt assets varies from state to state, but generally, you can keep homes with a moderate amount of equity, a vehicle, and your personal belongings. Typically, filing Chapter 7 takes 90 to 180 days, and it costs a few hundred dollars in administrative fees.

Chapter 7 Bankruptcy Requirements to Discharge IRS Income Taxes

The IRS only discharges taxes in bankruptcy if the taxes owed meets certain conditions. If you do not meet these or if you miss a deadline even by a day, the tax may be due at the end of your bankruptcy proceedings. Here are the conditions:

• Only Income Tax — You can only discharge income tax through a Chapter 7 bankruptcy. You cannot usually include payroll taxes, business sales taxes, excise taxes, or other types of taxes.
• At Least Three Years Old — This is the three-year rule. You can only include taxes that are at least three years old. The clock starts on the return due date. That is usually April 15 of every year. If you request an extension, the three-year period begins on the tax-filing extension due date. That is usually October 15.
• Filed at Least Two Years Ago — You must have submitted the tax return associated with the taxes owed at least two years ago. For example, you cannot file an old return from three years ago and include that taxes owed in bankruptcy the following week. In this situation, the tax is old enough, but the filing is too recent.
• Not From a Substitute Return — A substitute return is when the IRS files a return on your behalf. You cannot include taxes from a substitute return in your bankruptcy. You must file the tax return yourself.
• Assessed at Least 240 Days Ago — If the IRS makes changes to your return or adds to your unpaid taxes that is a tax assessment. You can only include assessed taxes if the assessment occurred 240 days ago or more.
• No Fraud or Evasion — If you are convicted of tax evasion or fraud, you cannot include taxes in your bankruptcy.

On top of these requirements above, you must prove to the courts that you have filed the last four years of tax returns. You also need a copy of your most recent tax return. Unfortunately, if you have any tax liens, a Chapter 7 bankruptcy will not get rid of them.

General Requirements to File for Chapter 7

To qualify for Chapter 7, you also have to meet some additional criteria. Here are some of the most important requirements:

• Your current monthly income over the last six months is equal to or below your state’s median income for your family size.
• You take a means test to determine whether or not you have the ability to pay some of your back taxes and liabilities with your disposable income. If you pass the means test, you may need to file Chapter 13. With Chapter 13, you make repayments on your liabilities for a certain amount of time.
• You complete credit counseling with a government-approved nonprofit organization.
• You complete a “Statement of Financial Affairs” form for the courts.
• Provide a copy of your most recent tax return to the bankruptcy court (sometimes they may ask for the last two years).

It is essential that if you file for bankruptcy that you do not incur additional liabilities. In other words, you may need to adjust or make estimated tax payments or adjust IRS withholding, so you do not continue to accrue taxes.

Documents You Need to Provide Bankruptcy Trustee

To prove many of the requirements above, the official appointed to your case (aka bankruptcy trustee) will need documents required by section 521 of the bankruptcy code. Alternatively, you may file them with the court (depends on local practices).  As discussed above, your trustee usually will request these documents (although your trustee’s document demands may be different):

• Copy of your most recent tax return (sometimes the last two years)
• Previous 2 months of bank statements
• Last two months of pay stubs

Other Documents Your Trustee Might Request

Your trustee, in most cases, may request additional documents from you. Therefore, it is in your best interests to have these documents available. Some of these documents include:

• Mortgage statements
• Bank statements past 60 days
• Investment account statements
• Retirement account statements
• Pension account statements
• Car loan statements
• Life insurance statements
• Divorce or marital settlement-related paperwork
• Appraisals of your car, house, or other property
• W-2s, 1099s, receipts for expenses

Discharge At the End of Chapter 7 Bankruptcy 

Once your Chapter 7 bankruptcy comes to a conclusion, you will receive a discharge of your liabilities. In other words, for those liabilities that are dischargeable, you will not be personally liable anymore. In regards to taxes, if you meet the specific rules above, then you will not owe the taxes anymore. However, the circumstances and facts of each case largely determine whether you can discharge your taxes and other liabilities.

Because it has such serious consequences on your credit, you should only pursue bankruptcy as a last resort. Moreover, bankruptcy doesn’t get rid of trust fund penalties or several other types of taxes. Before filing for bankruptcy, make sure to explore all other options. It is recommended you reach out to a tax attorney and bankruptcy attorney. You can start your search here for tax attorneys that help with tax bankruptcy, or start your search below for the best tax professional to help with your unique tax situation.

FAQs for IRS Innocent Spouse Relief

Here are some frequently asked questions regarding IRS Innocent Spouse Relief. Feel Free to send us a question that you don’t see answered here.

What is the IRS Innocent Spouse Rule?

The IRS Innocent Spouse Rule provides an exception to the joint and several liability on a joint return. Normally, both spouses are responsible for the tax due on a joint tax return. However, if your spouse omitted income or didn't pay the tax bill and you were unaware of the situation, you may qualify for relief. 

What is equitable IRS relief?

The IRS will also grant innocent spouse relief in situations where a reasonable person would think that it's unfair to hold you responsible. This is called IRS equitable relief. If you don't qualify for the other types of innocent spouse relief, you should look into equitable relief. It's also the only option if your spouse underpaid the tax. 

What qualifies for Innocent Spouse Relief?

You can request innocent spouse relief if your spouse or ex-spouse underreported or underpaid federal income taxes on a jointly filed tax return. Underreported means that the spouse or former spouse didn't report all of their income or claimed excess credits to lower (or underreport) their tax due. Underpayment is when your former spouse didn't pay the tax due that was shown on the return.

How does the IRS define actual knowledge?

You may hear this phrase when applying for innocent spouse relief. If you actually knew about the error made by your spouse, you have “actual knowledge”. You don’t qualify for innocent spouse relief. Both you and your spouse are still liable. However, you don't need to know all the details to have actual knowledge. For instance, say that you knew your spouse had $20,000 in income that they didn't report on your joint return, but you weren't sure how they earned the income. This counts as actual knowledge. 

What if you have actual knowledge but you signed under duress?

You may be able to get separation of liability even if you had actual knowledge of the understatement. For example, imagine that you knew your ex-spouse wasn't reporting income, but you were afraid to say anything so you signed the return. When reviewing your request for relief, the IRS will take into account the fact that you signed under duress or were coerced into signing. 

What is the deadline or time limit for filing for Innocent Spouse Relief?

In most cases, you must file for innocent spouse relief no later than two years after the day the IRS first tried to collect the tax from you. However, there are exceptions.

If you are applying for equitable relief related to taxes owed, you have up to 10 years from the date the tax liability was assessed. If you are applying for a credit or refund under the equitable relief program, you have until the later of three years after the date of assessment or two years after the payment was made.

How can I find tax professionals that specialize in innocent spouse relief?

Here at TaxCure, we have a network of tax professionals who give details on the type of work that they specialize in. We then have an algorithm that ranks those pros based on those specialties to help taxpayers find the best pros for their unique situation. You can follow this link here to see the top-rated innocent spouse relief experts, or you can start your search below and apply the applicable filters to your search.

How does the IRS define “reason to know”?

This is another common phrase when applying for innocent spouse relief. “Reason to know” refers to cases where the IRS believes it’s reasonable that you knew about the issue. For example, if you knew about related facts or information, the IRS may assume that you also had reason to know about this issue. If you had reason to know, you cannot qualify for innocent spouse relief.

What does benefiting from the understatement of tax mean?

In some cases, the IRS may claim that you had a reason to know because you benefited from the understatement of tax. Say that your spouse was earning $80,000 from a side business that they were not reporting to the IRS. You claim that you didn't know about the money. However, your family lived well beyond its means. Due to the extra income, you went on several vacations every year and bought an expensive boat. This means that you benefited from the understatement of tax, and the IRS may deny your request for relief. You can benefit either directly or indirectly. 

Can you apply for innocent spouse relief if you're still married?

You may be able to apply for classic innocent spouse relief or equitable relief if you are still married. To apply for separation of liability, you must either be divorced or not living in the same household for at least 12 months. You can't apply for this type of innocent spouse relief if you're still married and living together. In all cases, however, the IRS takes into account your relationship when reviewing your application. 

What does the IRS mean by members of the same household?

To qualify for some type of relief, you must not be a member of the same household as your spouse/ex-spouse. You and your spouse are not members of the same household if you are living apart. However, if you are still romantically involved or if your spouse is likely to move back, the IRS considers that you are still members of the same household.

What are erroneous items?

Erroneous items can be unreported income or incorrect deductions and/or credits, or incorrect cost basis for capital gains or losses. For example, imagine that your spouse claimed a $10,000 deduction for advertising expenses for their business, but they never actually paid for that much advertising. That is an example of an erroneous item for an innocent spouse claim. 

What type of taxes qualify for innocent spouse relief? 

You can only apply for innocent spouse relief on individual income tax and self-employment tax. For example, if you owe household employment taxes for a cleaning person or nanny, you cannot apply for innocent spouse relief on those taxes. You also cannot apply this type of relief to business taxes or trust fund recovery penalties for employment taxes. 

Will the IRS contact my former spouse?

If you file for innocent spouse relief, the IRS will contact your former spouse and give him or her the option to participate in the process. There are no exceptions to this rule, even if you were a victim of abuse. However, the IRS will not reveal your contact information to your ex-spouse. Note that if your request is denied and you appeal to the Tax Court, your personal details may become a public record. To protect yourself, you should work with a tax professional who can help you navigate this situation. 

What forms do I need to file for innocent spouse relief?

In order to file for innocent spouse relief, you have to submit IRS Form 8857. If you were a victim of spousal abuse, you must also submit a letter explaining that. You may also want to submit a letter with extra details in other cases as well. A letter helps you explain why you meet the requirements for relief.

What is an understatement of tax?

An understatement of tax occurs when your return says you owe less tax than you really owe. This usually happens when someone doesn't report all of their income, reports excessive deductions, or claims credits they aren't entitled to. If your spouse understated the tax on your return without your knowledge, you can apply for spouse relief.

What is an underpayment of tax?

This occurs when the total tax amount on the tax return is correct but the taxpayer fails to remit full payment. If this situation, the innocent spouse cannot apply for traditional innocent spouse relief. But they can apply for equitable relief. 

When am I liable for my spouse's tax liabilities?

When it comes to taxes, married couples can file their return jointly or separately. If you and your spouse decide to file jointly, you will both be liable for any tax liability incurred. This means that if your spouse owes back taxes, the IRS can come after you for the money. However, if you file your taxes separately, you will not be held responsible for your spouse's taxes owed.  Ultimately, it is up to you and your spouse to decide which filing status is best for your situation. If you own joint assets and you aren't personally responsible for your spouse's tax liability, your joint assets can still be at risk of levy from the IRS.

Can I get partial innocent spouse relief?

In some cases, you may qualify for partial innocent spouse relief. This comes into play if you know about some of the income your spouse understated but not all of it. To give you an example, imagine that you knew your spouse won $5,000 at a casino but didn't report it. However, you didn't realize that your spouse actually won $25,000. In this case, you can apply for innocent spouse relief on the $20,000 but not the $5,000. 

What is the difference between injured and innocent spouse relief?

Innocent spouse relief is when you apply for relief of a tax bill due solely to your spouse's understatement of tax. It also includes situations where you ask the IRS to separate the tax liability on a jointly filed return after the end of a relationship. In contrast, injured spouse relief applies when the IRS keeps your tax refund to pay for a debt due solely to your spouse.

For instance, if the IRS seizes the refund from your jointly filed return for your spouse's child support or unpaid taxes from before you were married, you can apply for injured spouse relief. File Form 8379 (Injured Spouse Allocation). If the IRS approves your request, your share of the refund won't be seized for your spouse's debt. 

If I qualified for an offer in compromise, can I still qualify for innocent spouse relief?

No, you cannot qualify for innocent spouse relief if you already qualified and settled your taxes with an offer in compromise. If you've already applied for an offer in compromise for the tax year in question, you should not also apply for innocent spouse relief. 

How many years can my innocent spouse relief filing cover?

Your innocent spouse's relief filing will cover up to six years on the same form. If you want to cover more than six years you will have to file a separate IRS Form 8857 for the additional years.

Applying for innocent spouse relief can be complicated. If you're like most applicants, you probably have a lot of other questions. To get answers to your questions and help applying for relief, contact a tax professional today. Using TaxCure's search feature, you can look for a local tax pro based in your area who has experience with this program. They can answer your questions about IRS innocent spouse relief, and then, they can also let you know if your state has a similar program. 

Help With Innocent Spouse Relief: Relief from Joint Liability

Do you need help with innocent spouse relief, equitable relief, or separation of liability? Not sure if you qualify? Need help understanding the detailed requirements? You can find a list of tax professionals that have experience with innocent spouse relief here. At TaxCure we have a large network of professionals that specialize in tax problems and tax solutions. Our algorithm helps you find the best professional based upon your unique needs. Check out the results and find the best professional to help. Click the aforementioned link or start your search below.

Various licensed tax professionals specialize in innocent spouse relief, and they know exactly what criteria you need to get your request accepted. Furthermore, these professionals can analyze your situation and let you know if you are a good candidate for relief. If you qualify, they can file all the documents and deal with the IRS and/or state for you.

If you are not a good candidate for innocent spouse relief, they can suggest other options for settling your taxes and resolving your problems with the IRS and/or State.

How a Tax Professional Can Help with Innocent Spouse Relief

A tax professional improves the chances that your request for relief will be accepted and whether you qualify (so you don't waste money or time). Consequently, if your request is rejected, requesting relief for the same year(s) will be difficult. That’s why it’s important to file correctly the first time.

Here are some advantages to using a tax professional for innocent spouse relief help:

• The IRS and many states actually prefer working with a tax professional. As a result, tax professionals make the jobs of IRS/State employees easier.
• A tax professional can stop collection activities such as wage garnishment or asset seizure. Realize, that as soon as the professional puts in your application for relief, all collection activity stops.
• A tax professional can help you decide if your request for relief is likely to get approved and can help you with the process.
• Tax professionals understand all the rules and requirements. You don’t have to worry about reading confusing instructions and filling out long forms.

How Innocent Spouse Relief Service Usually Works

Many tax professionals will give you a free no-obligation consultation to determine if you are a great candidate for Innocent Spouse Relief, Equitable Relief, or Separation of Liability Relief. The consultation generally carries no obligation. Many professionals start off with an investigation, which will confirm what you owe, penalties and interest assessed, as well as any required tax return filings. Finally, a tax professional will provide guidance on tax programs you may want to pursue.

Second, you will obtain a cost estimate for the tax services needed to get into compliance and into a resolution with the IRS and/or State. This estimate will break down the services required to get you into compliance and into a resolution with the IRS and/or State.

Third, if you decide you want the tax services, a tax professional official can represent you with a completed power of attorney submitted to the IRS or the state taxation authorities. Consequently, this process stops the IRS (and/or State if you submit a State POA) from contacting you and routes all communication through your hired tax team.

Fourth, your licensed tax team will file all required forms and documentation. You may need to retrieve certain documents required for your tax resolution or tax filing.

IRS Equitable Relief: Requirements for Qualification (Section 6015f)

IRS Equitable relief is the most general type of relief under the innocent spouse relief program. This program can give you relief from joint and several liability from taxes on a married filing jointly return, but it is subject to a lot of interpretation. 

The IRS automatically considers this option for people who don't qualify for innocent spouse relief or separation of liability relief. You can also apply directly to this program if you know that you don't qualify for the other types of relief.

This is a complicated program, and for best results, you should work with a tax pro who has extensive knowledge of the income tax laws in relation to a joint return. This is one of the 10 most litigated tax issues. In other words, innocent spouse and equitable relief claims are more likely to go to tax court than most other tax issues.

What Is IRS Equitable Relief?

Equitable relief is when the IRS decides that it's unfair to hold you responsible for your spouse or former spouse's tax debt on your joint return. This form of innocent spouse relief is the only one that allows you to get relief from an underpayment of tax when your spouse doesn't pay the tax. It can also apply to an understatement of tax on your joint return. Here are some concepts that you should understand before you ask the IRS to grant equitable relief to you.

What Is Underpayment Vs Understatement of Tax?

The other types of innocent spouse relief primarily focus on the understatement of a tax liability. This happens when someone doesn't report all of their income or when they claim excess credits to reduce the amount of their income tax liability on their tax return. As the requesting spouse, you can ask for relief if your spouse or former spouse understated the tax.

An underpayment of tax is a situation where the amount shown on the return is correct but the taxpayer fails to pay the full amount. For example, imagine that you (the requesting spouse) gave your former spouse $5,000 for your tax debt, but your former spouse spent the money on gambling. In this type of situation, you can ask for relief on the unpaid income tax liability. IRS equitable relief is the only spousal relief program that lets you request help with unpaid tax caused by your spouse or former spouse.

Who Is the Requesting Spouse?

The requesting spouse is the one who applies for innocent spouse relief. When you are a requesting spouse, you have to establish why you deserve this type of relief. The other spouse or former spouse is called the non-requesting spouse. Both of you filed a joint return together.

What If My Spouse Doesn't Pay Tax?

 As explained above, this is the only type of spouse relief that can help you if your spouse doesn't pay the tax debt that you owe from your joint return. Generally, the other types of spousal relief focus on separation of liability relief.

Separation of liability relief is when the IRS breaks down the income reported in your return to figure out which part of the tax debt is owed by you (the requesting spouse) versus your spouse or former spouse. Then, you're only responsible for your portion of the bill plus anything stipulated in your divorce decree. If you live in a community property state, the community property law as well as your divorce decree can affect how this plays out.

However, separation of liability relief doesn't have to come into play in this program. With this program, even if part of the tax bill was yours, you may be able to get relief if your spouse didn't pay the bill.

What Does the IRS Consider When You Apply for Equitable Relief?

Whether you're applying for equitable relief because your spouse understated the tax or didn't pay the tax, the IRS will start by considering the following seven factors:

• The marital status of the requesting spouse. Unlike innocent spouse relief focused on liability seperation, you don't have to be divorced to get equitable relief, but it can help your case. However, if you want streamlined approval, you must be divorced or no longer married.

• If you will experience economic hardship if the relief isn't granted.

• If you know about the situation that caused the understatement or underpayment of the tax. You don't necessarily need actual knowledge.

• If you or the non-requesting spouse had a legal obligation to pay the tax debt. For instance, if your divorce decree stipulates that one of you should pay it.

• If you received a significant benefit. Even if you didn't have actual knowledge about the issue, the IRS may not grant equitable relief if you received a significant benefit.

• If you are generally compliant with tax reporting and payment requirements.

• Your mental and physical health.

These are not the only elements the IRS considers. Remember, this is a subjective part of the law, and the IRS looks at multiple elements to assess fairness. The following sections cover more about the requirements for equitable relief.

 

Conditions to Qualify for Equitable Relief

In order to qualify for equitable relief, you must meet all of the following conditions:

You Do Not Meet the Requirements for the Other Types of Innocent Spouse Relief.

In other words, you do not qualify for innocent spouse relief or separation of liability relief. Again, if you request relief from these programs and get denied, the IRS will automatically see if you qualify for relief under this program.

With All Circumstances and Facts Considered, the IRS Determines It Is Unfair to Hold You Liable

It would be unfair to hold you liable for the understatement or underpayment of taxes. To establish this fact, the IRS may take into account the following factors. These are essentially a repeat of the elements listed above:

• Your marital status

• If you knew or had reason to know when signing the return about the items causing the understatement. With an underpayment situation, whether the requesting spouse had reason to believe his or her spouse or former spouse would pay the taxes. You may be able to get partial relief if you only knew about some of the issue.

• Whether you would suffer economic hardship without relief. Hardship refers to an inability to pay reasonable basic living expenses.

• If there is a legal obligation under the divorce decree or agreement to pay the tax from your joint income tax return.

• Whether you received significant benefit from the unpaid tax or understatement of tax.

• Your mental and physical state when you signed the return or at the time you requested relief.

• To whom the tax interest and penalties are attributed. Normally, you have joint and several liability with a joint return, but again, when you request relief, the IRS looks past the usual law to see what's fair.

• If you made an effort to comply with income tax laws following the taxable year or years to which the request relates.

• If your spouse or ex-spouse abused you. If you are in an abusive situation, consider calling National Domestic Violence Hotline at 1-800-799-7233.

You and Your Spouse/Ex-spouse Did Not Transfer Assets to Deceive the IRS or Another Third Party

In other words, your spouse/expose and you didn't transfer assets to each other to avoid taxes or to deceive someone other than the IRS. However, if you only own the property due to a community property law in your state, this doesn't apply. Similarly, you can get an exemption from this rule if your ex-spouse was abusive or if you weren't aware that the property was transferred to you.

You Didn't File or Fail to File a Tax Return With the Intent to Defraud

If you filed an incorrect tax return (signed it) or failed to file a tax return at all, you must not have had the intention to commit fraud. A fraudulent scheme is when you intend to cheat on your taxes. A mistake is not the same as a fraudulent scheme.

The Taxes That You Want Relief From Relates to an Item Attributed to Your Spouse.

There are a few exceptions to this rule:

• You did not know that funds meant for payment of tax were misappropriated by your spouse/ex-spouse.

• The item is yours only due to common property laws.

• You can prove that you were a victim of abuse before signing the tax return. You must also show that you didn't challenge any items on the tax return because of fear of your spouse.

• Item(s) is in your name but you can prove that it is not actually yours.

• You establish your spouse or former spouse's fraudulent activities are the reason for the errors on the tax return causing the tax understatement.

Your Request Must Be Within Respective Statutory Time Periods

• If A Balance Is Due, You Have to File Within Time Frame IRS Has to Collect – If you have a balance due, the IRS generally has 10 years from the date of assessment to collect. Therefore, if you have a balance due you need to file Form 8857 within the time period the IRS can legally collect.

• Generally, 3 Year Time Limit for a Credit or Refund – If you are requesting a refund or credit for taxes paid, you must file the request within 3 years after the date the tax return is filed or 2 years following the payment of tax, whichever is later. However, exceptions exist for those in a federally declared disaster area or those mentally unable to manage their finances.

• If You Have a Balance Due and a Credit or Refund – The time periods discussed above apply for any credit or refund for any payments made. Moreover, the collection time period (generally 10 years) will apply for a balance due to unpaid taxes.

Refund Limits with IRS Equitable Relief

There are a few exceptions and cases where you may be able to get a refund.

• If the IRS grants you relief related to an understatement of tax, the IRS may grant a refund on payments made through a payment plan. You must have made the payments after you applied for innocent spouse relief. Moreover, you cannot have defaulted on your payment agreement. The payments must be related to the tax or penalty for which you are seeking relief.

• If you receive relief for underpayment of tax, you can receive a refund on payments you have made. You must have made the payment on your own and not with your spouse. There are time restrictions on these payments and their eligibility for a refund.

Can You Reapply for Equitable Relief IRS After a Denial?

In most cases, the only reason to reapply for equitable relief after a denial is if your situation has changed. For instance, if you are no longer married, you may want to reapply. For best results, you should contact a tax pro who has experience with the IRS's equitable relief program. They will be able to let you know if equitable relief is the right option for your situation. If not, they should be able to help you explore other options for dealing with unpaid taxes or the income tax liability of your spouse or former spouse.

Equitable relief is a great form of relief, but it can be challenging to get this type of innocent spouse relief. Even if a taxpayer meets the eligibility requirements there is no guarantee that the IRS will approve the relief request. It is best to work with a tax professional when filing for this type of relief. Here you can find a list of tax professionals who have experience with innocent spouse cases. Or you can start your search below using the applicable filters.

Useful Articles Related to IRS Tax Appeals

IRS tax appeals are available to those taxpayers that do not agree with particular decisions made by the IRS. The good thing about the office of appeals in the IRS is that it is independent of any other IRS office and is designed where disagreements concerning the application of tax law can be resolved on a fair and impartial basis. Below are some tax decisions that you can appeal. Understand when you can appeal and how you appeal each of these types of decisions made by the IRS. According to IRS statistics, Appeals result in a tax bill that is 40% lower on average.

Appeal an IRS Tax Levy

Once you receive a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” you have 30 days to appeal the decision to levy prior to them taking action. Understand when it is appropriate to consider appealing a tax levy and learn how to request an appeal.

Appeal an IRS Tax Lien

Once a tax lien is filed you will be notified within 5 days. In this notice, you will be given the option to request a hearing. Understand when it is appropriate to request an appeal of an IRS tax lien, how to request the appeal, and who can represent you in the appeal

Appealing an Installment Agreement Decision

Appealing an IRS Installment Agreement (IA) is within your rights as a taxpayer if it is denied or rejected, terminated, or proposed for termination. Understand how to appeal a rejected installment agreement, common reasons for rejection, and how to reinstate the installment agreement.

Appealing an Offer In Compromise

You have the right to appeal an offer in compromise that was rejected by the IRS within 30 days of the date on your rejection letter. Understand some steps or guidelines to follow when requesting an appeal.

IRS Form 12153 – Filing a Collection Due Process Hearing (CDP)

If you receive a notice of intent to levy or a notice of federal tax lien, you have the right to file an appeal. With lien and levy notices, the IRS will send your rights to a hearing. Understanding if you should file a CDP hearing and how to do so.

IRS Collection Appeals Program & Form 9423 (CAP)

How the IRS Collection Appeals Program works to help you resolve your tax problem with the IRS. Details on how and when the CAP process can be used. Details on how to request it and how to use form 9423.

If you are looking to appeal an IRS decision or enforced collection action with the help of a tax professional, you can see qualified a list here, or you can start your search below. 

IRS Bank Levy Overview: Rules and What to Do

An IRS bank account levy is when the IRS seizes funds directly from your bank account to cover back taxes you owe.  Usually, the IRS contacts your bank about your taxes owed. Next, your bank must freeze your assets for 21 days from the day it receives the IRS notice.  Consequently, if you don’t take action during that time, the bank sends all the funds to the IRS.

An IRS bank levy will only impact the current funds in the account. In fact, once your bank activates the bank levy, it will not affect any future deposits.  The IRS can issue another bank levy later. However, this rarely happens. 

Usually, this is the last line of defense for the Internal Revenue Service. The IRS only uses this enforcement collection method after trying to contact you several times without getting a response. To understand more about bank levies and how to stop them, explore the information in the links below.

What is a Bank Account Levy? How it Works, What to Expect

An IRS bank account levy allows the government to take funds from your bank account to pay off your tax liability. The IRS will send you a notice of intent to levy your bank account. Then, the agency will send a notice to your bank informing them of the levy and specifying how much money needs to be withdrawn from your account. Once the funds are withdrawn, you will have 20 days to request a hearing with the IRS to explain why the levy should be released. If you do not request a hearing or if the IRS does not release the levy, the money will be used to pay off your tax liability. In some cases, the IRS may also garnish your wages in order to satisfy your tax amount owed. However, an IRS bank account levy is one of the most common methods of collecting on unpaid taxes.

How to Stop or Release a Bank Account Levy

When you are subject to an IRS bank account levy, the first thing you need to do is try to stop the process as quickly as possible. One effective way to do this is by contacting the IRS directly and inquiring about how to dispute the levy. You will likely need to provide documentary evidence proving that your account is being levied in error, such as documented income that was not included in your tax filings, or other supporting documentation showing why the amount due on your taxes has been significantly reduced or eliminated. If you are able to successfully dispute the bank account levy with the IRS, then you may be able to have your funds released from hold and avoid any further penalties for late payment. Ultimately, understanding how to stop an IRS bank account levy can help ensure that you are able to protect your financial interests going forward.

Bank Levy Frequently Asked Questions (FAQs)

Answers to commonly asked questions about IRS bank account levies.

Get Professional Bank Levy Help

Worried about an IRS bank levy? You can find a licensed tax professional that specifically has experience in resolving IRS bank levies here. If you act quickly, they can stop the levy before the IRS seizes your money. Get a to understand your tax options and the fees associated with utilizing a licensed tax professional with no obligation. After you find a tax professional, message them to find out the best course of action. 

 

What is an IRS Bank Account Levy? How it Works, What to Expect

What Is an IRS Bank Levy?

An IRS bank account levy is a type of tax levy that is when the IRS seizes money from your bank account to cover your taxes owed. If the IRS has sent repeated notices demanding payment and you haven’t paid or tried to set up other arrangements, the IRS may issue a bank levy. When this happens, the bank freezes access to your account and eventually sends the funds to the IRS.

When Does the IRS Use a Bank Account Levy?

If you have unpaid taxes, the IRS sends multiple notices. Typically, each letter gets a harsher tone, and eventually, you receive a Final Notice of Intent to Levy. This notice states that the IRS intends to levy your bank account, wages, or any other property with the value to cover your tax bill.

Legally, the IRS cannot take action until 30 days after sending this notice. During that time, you need to pay your taxes in full, contact the IRS about a payment plan, or make other arrangements. If you fail to do anything, the IRS can legally seize your assets.

By law, the following conditions must be in place before the IRS can take your assets:

• The IRS assessed a tax liability and sent a notice to demand payment.
• The taxpayer ignored or declined to pay the tax due.
• The IRS sent a “Final Notice of Intent to Levy” 30 days prior to the levy.

The IRS sends these notices to your last known address, or the agency gives them to you in person at home or work. Once you receive the final notice, the levy may occur after 30 days have passed.

In rare cases, the IRS can levy your bank account without providing a 30-day notice of your right to a hearing.  Here are some reasons why this may happen:

• The IRS plans to take a state refund
• The IRS feels the collection of tax is in jeopardy
• You were served a Disqualified Employment Tax Levy

How Does an IRS Bank Account Levy Work?

After the 30 day grace period that ends (which gives you the option to appeal the levy during this time) from the Final Notice of Intent to Levy letter, the IRS decides which type of levy to use, including bank account levies and wage garnishment.

If the IRS decides to use a bank levy, it tracks down your bank account. In some cases, the IRS has your banking details from previous tax returns, and in other cases, it uses your social security number to find your bank account.

Next, the IRS will send Notice of Levy on Wages, Salary, and Other Income, generally Form 668–A(C)DO to your bank. Your bank must comply and freeze the funds. While your account is frozen, you won’t be able to withdraw the money. At this point, you have an additional 21 days to resolve the situation, otherwise, the bank will remit the funds to the IRS on the 22nd day.

If you don’t reach out to the IRS during that time, the funds in your account go directly to the IRS. If the bank doesn’t comply, the IRS holds them liable for the taxes. As a result, the bank always tends to comply with these demands for payment. 

The IRS only seizes the funds in the account when the levy was placed. If you make additional deposits during that time such as direct deposit paychecks, the IRS has to issue a new levy to get those funds. If you have outstanding checks or automatic payments when the freeze goes into effect, you may want to make a deposit to cover those impending withdrawals.

An IRS bank account levy is probably the harshest collection mechanism used by the IRS. Can you imagine not having access to your money because the IRS took control of your account? It is important to take action as soon as possible to limit the effects of the levy.

The IRS only uses levies as a final solution for unresponsive taxpayers. The agency would much rather work with taxpayers to reach a solution that works for everyone. If you are facing a levy, you should get help immediately and understand the ways an IRS bank levy is stopped or released.

Help With an IRS Bank Levy & How TaxCure Works

A qualified tax professional can help you successfully negotiate a payment plan, apply for a settlement, or get hardship relief. At TaxCure, we have a network of the top tax professionals from around the country and we have a unique algorithm that can find the best professionals based upon specific problems and solutions. Our goal is to increase  transparency when looking for a tax professional and make it much easier to find the best pro that meets your specific issues. You can find a licensed tax professional that specifically has experience in resolving IRS bank levies here. You can message them after looking at their expertise, years of experience, background, reviews, and more.