If you’ve received a notice from the IRS claiming you owe a "deficiency," you might be staring at the term understated tax and wondering what went wrong. Most taxpayers assume that if they filed their return and paid the amount on the bottom line, they are in the clear.
Unfortunately, an "understatement" is a different beast entirely—and it is the primary reason people seek Innocent Spouse Relief.
Understated vs. Underpaid: Knowing the Difference
Before we dive in, it’s important to distinguish between these two terms, as the IRS treats them very differently:
- Underpaid Tax: You filed your return correctly, and you knew exactly how much you owed, but you simply didn't send the check.
- Understated Tax: The math or the information on the return was wrong. The IRS believes you owe more than what was actually reported on the piece of paper you signed.
How Does an Understatement Happen?
An understatement typically occurs during an IRS audit or a document-matching process. The most common causes include:
- Omitted Income: Your spouse earned money (like freelance income or a gambling win) but didn't report it on the joint return.
- Incorrect Deductions: Claiming expenses that weren't actually business-related or inflating charitable contributions.
- Invalid Credits: Claiming tax credits (like the Earned Income Tax Credit) that you weren't actually eligible for.
A Real-World Example
Imagine you and your spouse file a joint return showing you owe $5,000. You pay that amount in full. A year later, the IRS discovers your spouse had a secret side business that earned an extra $30,000.
The IRS recalculates your taxes and determines you actually owed $15,000. That $10,000 difference is the "understated tax." Under the rule of Joint and Several Liability, the IRS can come after you for that $10,000, even if you never saw a dime of that side-business income.
Why This Matters for Innocent Spouse Relief
The IRS only grants traditional Innocent Spouse Relief (under Section 6015(b)) for understated taxes.
If your tax return was 100% accurate but your spouse simply spent the money instead of paying the IRS (an underpayment), you generally cannot use the standard Innocent Spouse claim. In those cases, you must look into Equitable Relief, which is a more flexible (but harder to prove) category.
What Should You Do Next?
If you’ve been blindsided by a tax deficiency caused by your spouse’s errors or omissions, you aren't necessarily stuck with the bill. Proving that you had "no reason to know" about the understatement is the key to protecting your bank account.
