Widowed and Facing Your Late Spouse's Tax Debt: Innocent Spouse Relief for Survivors

Grief comes with paperwork. Sometimes, months after the funeral, it also comes with an IRS notice about a joint return your spouse prepared, or a business your spouse ran, or a balance you never knew existed. The tax code does not forget joint liability when a spouse dies. But it does give survivors specific paths to relief, and some of them are easier to reach for a widow or widower than for anyone else.

You are still liable, for now

Internal Revenue Code section 6013(d)(3) makes liability on a joint return joint and several. Death does not change that for returns already filed. The IRS can collect the entire joint liability from the surviving spouse.

What death does change is your eligibility for the relief provisions and how the IRS weighs your request.

Separation of liability is open to you

Separation of liability under section 6015(c) is normally limited to spouses who are divorced, legally separated, or have not lived in the same household for 12 months. Treasury Regulation 1.6015-3(a) adds widowhood: a requesting spouse who is widowed may elect to allocate a deficiency.

That matters because separation of liability is often the strongest tool for a spouse who did not actually know about the other spouse's income. The IRS must prove actual knowledge, by a preponderance of the evidence, under Treasury Regulation 1.6015-3(c)(2). Reason to know is not enough. If your late spouse handled the business and the books, and you did not know what came in, this may be your best route. See the guide to separation of liability.

Remember the limits. Separation of liability covers deficiencies only, not unpaid tax that was correctly reported, and section 6015(g)(3) bars refunds under it.

Equitable relief: how widowhood is weighed

Revenue Procedure 2013-34, section 4.03(2)(a), treats a requesting spouse as "no longer married" for the marital status factor if the requesting spouse is a widow or widower and is not an heir to the nonrequesting spouse's estate that would have sufficient assets to pay the tax liability.

Read that carefully. Widowhood helps you on this factor, unless you inherit an estate large enough to pay the tax. If your spouse left you everything and everything is enough to cover the debt, the IRS will not treat you as no longer married for this factor.

Being no longer married is also one of the three elements of streamlined relief under section 4.02, along with economic hardship and lack of knowledge. See the guide to the section 6015(f) factors.

Significant benefit and life insurance

Here is a rule survivors need to know. Treasury Regulation 1.6015-2(d) says that evidence of significant benefit can include transfers of property received several years after the year of the understatement, and gives a specific example: if a requesting spouse receives property, including life insurance proceeds, from the nonrequesting spouse that is beyond normal support and traceable to items omitted from gross income attributable to the nonrequesting spouse, the requesting spouse is considered to have received a significant benefit from those items.

So if your late spouse's unreported income bought the life insurance, funded an account that passed to you, or paid for property you inherited, the IRS may treat that as a significant benefit, even though you received it after death and never knew where it came from. The guide to the significant benefit factor explains how this factor is weighed.

Transferee liability: relief is not always the end

Treasury Regulation 1.6015-1(j) says section 6015 relief does not negate liability that arises under other laws, including federal or state transferee liability or property laws. The regulation's own example involves a widow. A couple filed a joint return; the husband died; his executor transferred all of the estate's assets to the wife; a deficiency attributable to the husband was later assessed. The wife was relieved under section 6015 and the husband's estate remained solely liable, but the IRS may still seek to collect from the wife to the extent permitted under transferee liability or property laws.

In other words, relief protects you as a joint filer. It may not protect assets you received from the estate of the spouse who owed the tax. That is a question to plan for with the estate's personal representative.

What Form 8857 asks of survivors

Form 8857, line 7, asks your current marital status. If you are widowed, it asks for the date and says to attach a photocopy of the death certificate and the will, if one exists. Those documents bear on the marital status factor and on whether you are an heir to an estate with sufficient assets.

The usual deadlines still apply. Innocent spouse relief and separation of liability must be elected within two years after the IRS begins collection activity against you. Equitable relief can be requested before the collection statute expires for unpaid amounts, or within the refund period for amounts you paid. See the guide to the two-year deadline.

The year of death: a different set of choices

For the year your spouse died, you may face a fresh filing decision. Section 6013(a)(3) says that in the case of the death of one spouse, the joint return for the decedent generally may be made only by the executor or administrator. But the surviving spouse may file the joint return if no return has been made by the decedent for that year, no executor or administrator has been appointed, and none is appointed before the last day for filing the survivor's return.

If an executor is appointed later, section 6013(a)(3) and Treasury Regulation 1.6013-1(d)(5) let the executor disaffirm the survivor's joint return by filing a separate return for the decedent within one year after the last day prescribed for filing the survivor's return, including extensions. This is the one situation in which a joint return can be undone after the due date. See the guide to switching filing status.

Before you sign a joint return for the year of death, think about what you know, and do not know, about your late spouse's finances that year. A joint return creates joint and several liability for that year too.

Underpayments versus deficiencies after a death

Survivors often face both kinds of liability at once. A balance from a return your spouse prepared and never paid is an underpayment. Additional tax from an audit of your spouse's business is a deficiency. The distinction decides which relief is available.

For a deficiency, all three types of relief may be available: innocent spouse relief under section 6015(b), separation of liability under 6015(c) because you are widowed, and equitable relief under 6015(f).

For an underpayment, only equitable relief applies. The knowledge question becomes whether, when the return was filed, you knew or had reason to know your spouse would not or could not pay. If your spouse handled the finances and told you it was taken care of, document that. If your spouse controlled the finances by restricting your access to financial information, Revenue Procedure 2013-34 says that can cause the knowledge factor to weigh in your favor even if you knew.

Practical steps for a surviving spouse

1. Pull IRS account transcripts for every joint year.
2. Identify whether each balance is a deficiency from an audit or an unpaid reported balance.
3. Gather the death certificate, the will, and information about what you received from the estate, life insurance and joint accounts.
4. Coordinate with the estate's personal representative about any claims against the estate.
5. File Form 8857 requesting all three types of relief, attaching the line 7 documents.
6. Keep filing and paying your own current taxes. Compliance is a factor.