Innocent Spouse Tax Relief
Steve and Mary were married for eight years. During their marriage, Steve was rarely home, and spent most of his time working and entertaining clients of the advertising agency he owned. Mary did not work outside the home, and spent most of her time raising the couple’s three young children. Steve and Mary filed joint tax returns. Mary signed the couple’s joint return each year, despite the fact that she had very little knowledge regarding the couple’s finances. When Steve and Mary divorced, Mary got the house, the kids, and child support payments that always seemed to be insufficient to make ends meet.
Shortly after the divorce was final, Mary received an unpleasant surprise, a notice from the Internal Revenue Service that Steve hadn’t reported all of his income on the joint tax returns they had filed during their marriage. The notice went on to state that Mary would have to pay the additional tax owed on the unreported income, including penalties and interest. Mary contacted the IRS, and was advised that she was liable for the additional tax because she signed joint tax returns with Steve. Mary was now working to support herself and her children, and the IRS was threatening to garnish her wages for the tax liability.
Although the facts may vary somewhat, similar situations occur frequently. Sometimes one spouse dies before the other spouse discovers the unreported income or “creative/aggressive” tax planning. Sometimes, one spouse has filed a bankruptcy petition before the problem is discovered. Sometimes it is the wife who underpaid taxes and sometimes it is the husband. The common problem is that the IRS is trying to garnish wages or attach bank accounts simply because you filed a joint tax return with a spouse who underreported income.
In 1998, Congress recognized and addressed the spousal tax liability problem, and as part of Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), Congress changed the Internal Revenue Code to make the process for obtaining “innocent spouse relief” more equitable.
- Innocent Spouse Rules
The Innocent Spouse rules created by Congress in RRA 98 provide for three types of relief: 1. General liability relief is available under 6015(b). 2. Allocated liability relief is available under 6015(c), and 3. Equitable relief is available if you fail to qualify for one of the first two relief types.
- General Liability or 6015(b) Relief
A requesting spouse may elect relief from joint and several liability if: (1) a joint return was filed; (2) the return had an understatement of tax attributable to erroneous items of the spouse (non-requesting spouse); (3) the requesting spouse establishes that he or she had no knowledge or reason to know that there was an understatement of tax when they signed the return; (4) it would be inequitable to hold the requesting spouse liable for the understatement; and (5) the requesting spouse elects 6015(b) relief no later than two years after the date of the first collection activity after July 22, 1998.
- Allocated Liability or 6015(c) Relief
A requesting spouse may elect to allocate a deficiency between the spouses if: (1) a joint return was filed; (2) the requesting spouse is no longer married to, is legally separated from, or has not been a member of the same household as the non-requesting spouse at any time during the 12-month period ending on the date the 6015(c) election was filed; (3) the application is filed no later than two years after the date of the first collection activity after July 22, 1998; and (4) the deficiency remains unpaid.
- Equitable Relief
If a spouse does not qualify for either 6015(b) Relief or 6015(c) Relief, the IRS is authorized to grant “equitable relief” if it determines that it would be inequitable to hold a requesting spouse liable for any unpaid tax or any deficiency. The IRS will generally grant equitable relief for unpaid joint return liability if: (1) the requesting spouse is no longer married or is legally separated from the non-requesting spouse, or has not been a member of the same household as the non-requesting spouse for 12 months; (2) the requesting spouse had no knowledge or reason to know that the tax would not be paid when the return was signed and establishes that it was reasonable to believe that the non-requesting spouse would pay the reported liability; and (3) the requesting spouse will suffer economic hardship if relief is not granted.The IRS will consider a number of factors before determining whether to grant equitable relief. Some of the factors (positive and negative), include:
- Equitable Relief Factors
- Positive factors:
(1) requesting spouse is separated or divorced from the non-requesting spouse; (2) requesting spouse would suffer economic hardship if relief from the liability is not granted; (3) requesting spouse was abused by the non-requesting spouse (but the abuse did not amount to duress; (4) requesting spouse did not know and had no reason to know of the item or that the liability would not be paid; (5) the non-requesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the outstanding liability; (6) liability is solely attributable to the non-requesting spouse.
- Negative factors:
(1) the liability is attributable to the requesting spouse; (2) the requesting spouse knew or had reason to know of the item or that the reported liability would be unpaid at the time the return was signed; (3) the requesting spouse has significantly benefited from the unpaid liability or items giving rise to the deficiency; (4) the requesting spouse will not experience economic hardship if relief from the liability is not granted; (5) the requesting spouse has not made a good faith effort to comply with federal income tax laws in the tax years following the tax year(s) in question; (6) the requesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the liability.
- Positive factors: