Getting Your Money Back: Refunds Under Innocent Spouse Relief

Many people come to innocent spouse relief after they have already paid. The IRS took their refunds for years. They paid on an installment agreement to keep the wage levy off. They emptied savings to make the notices stop. Now they want to know: if I win, do I get any of that back?

Sometimes yes. It depends on which kind of relief you get, whose money paid the tax, and when you ask.

The general rule

Internal Revenue Code section 6015(g)(1) says that, except as provided in paragraphs (2) and (3), and notwithstanding any other law or rule of law other than sections 6511, 6512(b), 7121 and 7122, a credit or refund shall be allowed or made to the extent attributable to the application of section 6015.

Read that list of exceptions carefully:

• Section 6511 is the refund statute of limitations.
• Section 6512(b) deals with overpayments determined by the Tax Court.
• Sections 7121 and 7122 are closing agreements and compromises.
• Paragraph (2) is the res judicata rule for prior court decisions.
• Paragraph (3) bars refunds under separation of liability.

Which relief can produce a refund

Innocent spouse relief under section 6015(b): yes. Subject to the limits below.

Equitable relief under section 6015(f): yes. Subject to the limits below. Revenue Procedure 2013-34, section 4.04, says refunds are available in both understatement and underpayment cases.

Separation of liability under section 6015(c): no. Section 6015(g)(3) says no credit or refund shall be allowed as a result of a 6015(c) election. Treasury Regulation 1.6015-3(c)(1) adds that relief under that section is only available for unpaid liabilities resulting from understatements.

This is one reason you should request all three types on Form 8857. A separation of liability election may cap what you still owe, while innocent spouse or equitable relief may be what gets back what you already paid.

Whose money paid the tax

This is the condition that eliminates most refund requests. Revenue Procedure 2013-34, section 4.04, says a requesting spouse is eligible for a refund of separate payments made after July 22, 1998, if the requesting spouse establishes that the funds used to make the payment were provided by the requesting spouse.

It then lists what is not refundable:

• Payments made with the joint return.
• Joint payments.
• Payments made by the nonrequesting spouse.

The Form 8857 instructions give an important example: withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return.

The joint overpayment exception

There is one category that surprises people in a good way. Revenue Procedure 2013-34 says you may be eligible for a refund of your portion of a joint overpayment from another tax year that was applied to the joint liability, to the extent you can establish that you provided the funds for the overpayment. The Form 8857 instructions say the same and note that you will need to show your portion of the joint overpayment.

Your separate refunds that were offset

If the IRS kept your separate refund from a year when you filed on your own and applied it to the old joint liability, that is your money. The Form 8857 instructions say no proof of payment is required if your individual refund was used by the IRS to pay a tax you owed on a joint return for another year. IRM 25.15.1 instructs IRS employees that when a requesting spouse's overpayment was offset to the year for which relief is requested, they should assume the requesting spouse wants a refund of the offset.

Proving it was your money

For other payments, the burden is on you. The Form 8857 instructions say the IRS will only refund payments you made with your own money and that you must provide proof. Examples are a copy of your bank statement or a canceled check.

That sounds simple until you remember that many couples had only joint accounts. If the payment came from a joint checking account, expect a fight over whether it was your money or joint money. If you paid after separation from an account in your name only, with your own wages, the proof is much cleaner.

Start gathering:

• Bank statements for the account that made each payment.
• Proof that the account was yours alone, or that the deposits were your wages.
• Canceled checks or electronic payment confirmations.
• Installment agreement payment records.
• IRS account transcripts showing each payment and offset.

Ask for it, or you will not get it

Line 25 of Form 8857 is a checkbox. The instructions say you must indicate that you want a refund of payments you made for the IRS to consider whether you are entitled to it. Payments include refunds from another tax year applied to this liability. Check the box.

The time limits

Being entitled to a refund is not enough. It also has to be timely. Section 6015(f)(2)(B) says a request for equitable relief from a paid liability must be made during the period in which you could submit a timely refund claim. The refund limitations of section 6511 apply to innocent spouse relief refunds through section 6015(g)(1).

The Form 8857 instructions summarize the limit on the amount:

• If you file Form 8857 within 3 years after filing your return, the refund cannot exceed the tax paid within 3 years, plus any extension of time for filing your return, before you filed Form 8857.
• If you file after that 3-year period but within 2 years from the time you paid the tax, the refund cannot exceed the tax paid within the 2 years immediately before you filed Form 8857.

In practical terms, payments made long ago are often out of reach. Every month you wait can push another payment outside the window. The guide to the equitable relief deadline has more detail.

When the refund belongs to someone else

Do not confuse innocent spouse refunds with injured spouse allocations. If the IRS took a joint refund to pay a debt that only your spouse owed, such as your spouse's child support or student loan, that is an injured spouse situation handled on Form 8379. Innocent spouse relief deals with your liability for the joint tax itself. The guide comparing injured spouse and innocent spouse relief explains the difference.

A realistic example

Suppose a joint return for an earlier year was later assessed additional tax because of your former husband's unreported consulting income. After the divorce, the IRS kept your separate refunds for two years and applied them to the joint balance, then you entered an installment agreement and paid $200 a month from your own checking account. You file Form 8857, check line 25, and are granted innocent spouse relief.

Your offset refunds are candidates for refund without separate proof of payment. Your installment payments from your own account are candidates if you prove the money was yours. Payments made with the original joint return, and the withholding on it, are not refundable. And everything is subject to the lookback limits. The exact result always depends on your dates and records.

Common mistakes on refund claims

Not checking line 25. The single most avoidable error. If the box is blank, the IRS may not consider a refund.

Assuming withholding is refundable. It is not. Withholding and estimated payments are treated as made with the joint return.

No paper trail. Saying "I paid it" is not proof. Statements showing the payment left an account that was yours are.

Waiting. The lookback rules cut off older payments. A request filed today may recover payments that a request filed next year cannot.

Relying only on separation of liability. If you have paid significant amounts, make sure your Form 8857 also requests innocent spouse and equitable relief, because section 6015(c) alone cannot refund anything.