Innocent Spouse Tax Debt Relief

How Tax Attorney Can Help You: Innocent Spouse Tax Debt Relief.

Internal Revenue Service Section 6013(a) authorizes a joint tax return for husband and wife. In general, spouses are jointly and severally liable for any tax interest, or penalty for a year in which they filed a joint tax return, meaning that the IRS can pursue either spouse for any tax delinquencies. I.R.C. §6013(d)(3).

In some circumstances, some taxpayers may be eligible to obtain relief from joint and several liability for the federal taxes plus penalties for its nonpayment by filing the IRS Form 8857, Request for Innocent Spouse Relief.

Taxpayer May Obtain Relief from Joint and Several Liability

Three opportunities for tax relief exist under I.R.C. §6015, also known as "an innocent spouse relief." In other words, the innocent spouse defense provides relief from additional tax you owe if your spouse or former spouse: failed to report income on filed joint returns, or reported income improperly, or claimed improper deductions or credits. Sections 6015(b), (c), and (f) provide relief from all or some of the joint tax liability if certain requirements are satisfied:

                1. Through traditional innocent spouse defense (marital status is irrelevant). I.R.C. §6015 (b);

A requesting spouse must prove that when the return was signed, s/he "did not know, and had no reason to know, that there was an understatement" of tax attributable to erroneous item of the nonrequesting spouse, and that it would be inequitable to hold requesting spouse responsible for the understatement for such taxable year. I.R.C. 6015(b)(1)(C) and Treas. Reg. §1.6015-2(c), -3(c)(2).

NOTE: the requesting taxpayer must make the election no later than two years after the date the IR begins collection activity.

The typical person seeking relief could be a married woman with kids who lives with her spouse. She has no control or little knowledge of the family finances. The husband is usually self-employed or has a side business that is the source of the joint return tax issues. He may be convicted of a tax fraud or other financial crime. Section 6015(b) relief is also available to a divorced, separated or widowed spouse who has already paid the deficiency and seeks a refund.

                2. Through a new procedure for electing separate liability. I.R.C. §6015(c) (this section applies a retroactive division of tax liability between taxpayers who are no longer a couple). The purpose of this section is to allocate the liability for a deficiency between spouses who filed a joint return in approximately the same manner as if they filed separate returns. If a taxpayer is granted relief, there are no refunds.

An electing spouse must prove that (1) s/he "did not have actual knowledge of the receipt of the income", (2) there is no evidence of scheme or fraudulent transfers between spouses, or (3) the electing spouse has not received disqualified assets (except as part of a dissolution of marriage). I.R.C. §6015(c)(3)(C). It should be noted, that relief can be barred even if the spouse had no knowledge of the tax law and didn’t know the tax consequences of that income, depending on each taxpayer’s individual situation.

The typical person seeking relief is someone who is divorced, separated, or widowed for the 12-months period before making the election, and who filed joint returns while married. More often than not, the joint liability arose after the separation event as a result of an IRS audit the non-requesting spouse did not disclose and without the knowledge of the spouse seeking relief. A widow(er) is treated as not married, and may make the election without regard to the twelve-month separation rule. Reg. §1.6015-3(a).

NOTE: Relief under section 6015(b) or (c) is premised on the existence of an understatement or deficiency.

               3. Through a new rule permitting equitable relief under certain circumstances. I.R.C. §6015(f). This Code section is a fallback provision when relief under sections 6015(b) or 6015(c) is not available. In some situations, it may be appropriate to grant relief under section 6015(f) even though the requesting spouse had actual knowledge of the item giving rise to the tax deficiency. The fact that the requesting spouse would suffer economic hardship (the inability to pay "reasonable basic living expenses") if not relieved from liability often is a deciding factor weighting in favor of relief. A typical scenario involves one spouse who has taken responsibility for the family’s finances, including the filing of annual tax returns, and paying taxes due, and another spouse reasonably relying on such promise. The responsible spouse did file the returns, however made no payment owed. However, no payment was made, and the couple may now be separated or divorced, or the spouse has died, and collection activity has begun.

To Qualify for Section 6015 Relief, Requesting Spouse Must Prove All these Facts

  • The relief sought relates to a jointly-filed income tax return. The most important factor is whether the taxpayer intended to file jointly with his/her spouse. Join and several liability does not exists if either spouse did not intend to file a joint return, if it was illegal to file a joint income tax return, or if a spouse signed the return under duress. Reg. §1.6013-4(d). It should be noted, that factors that demonstrate intent include the couple’s prior filing history.
  • The relief is not available under sections 6015(b) or 6015(c);
  • In signing the return, the spouse seeking relief did not know or have reason to know of the understatement on the return;
  • To elect equitable relief under either Section 6015(c) or 6015(f), the marital status of the electing spouse must meet the requirements specified in each section. But, to seek relief under section 6015(b), marital status is irrelevant.
  • The election was timely made either:
  • within two years after the date on which IRS began "collection activity", also known as a "30-day letter", with respect to the requesting spouse, with respect to the joint tax liability, or
  • an open-ended period, if IRS did not initiate collection activity. A taxpayer need not wait for a notice of deficiency in order to make an innocent spouse election. However, the IRS will not consider a premature claim for relief.
  • No assets were transferred between the spouses as part of a fraudulent scheme;
  • There is an understatement or deficiency of tax attributable to erroneous items of the nonrequesting spouse.

When all these facts are proven, the requesting spouse may succeed in making the proportionate liability election allowed by the IRS. It should be noted, that the requesting spouse’s good faith effort to comply with income tax laws after the year(s) in issue is a factor weighting in favor of relief, among other factors considered by the IRS while making its determination.

NOTE: If only one spouse makes the election and relief is granted in whole or in part, that spouse is responsible only for whatever portion of the understatement or underpayment (if any) is attributable to his or her "items"; the other spouse remains severally liable for the entire understatement or underpayment (depending on the provision under which the taxpayer elects relief). If both spouses requested relief as to different items on the return, and both are granted relief, then each owes only his or her proportionate share of the understatement (liability that arises from a deficiency adjustment) or underpayment (liability that was properly reported, but not paid).

Collection Issues

State law defines ownership interests in property for purposes of federal tax collections under I.R.C. 6321.

Under Internal Revenue Manual Section 25.18.1.2.1, "For federal tax purposes, a taxpayer’s rights and interest in property are determined under the laws of the taxpayer’s state of domicile. United States v. Mitchell, 403 U.S. 190 (1971); Morgan v. Commissioner, 309 U.S. 78 (1940)."

Under Internal Revenue Manual Section 25.18.1.1.4, "For collection purposes, the Service may collect taxes owed by only one spouse entirely from community assets or a portion thereof. This includes community property earned by or titled in the name of the other spouse."

Taxpayers in community property states, like Washington, may be disadvantaged because whatever creditor rights are afforded to general creditors under state law will apply to the IRS for tax collection purposes. For example, under Washington State law:

  • 100% of community property and all separate property of liable spouse is available to satisfy a post marital federal tax obligation assessed against only one spouse;
  • 50% of community property and all separate property of liable spouse is available to satisfy a premarital federal tax obligation assessed against only one spouse.
Relief from joint tax liability will not preclude the Service from filing a lien on community property. However, the spouse will be entitled to a refund of any separate property seized. It should be noted that a divorce decree’s allocation of responsibility for tax liability is not controlling. Nevertheless, the IRS does consider it as a factor, among other factors, in determining whether to grant equitable relief under section 6015(f) or even in non-section 6015(f) cases to ensure the equitable relief.

Innocent spouse relief may also be available if you were a resident of a community property state and did not file a joint federal income tax return, and you believe you should not be held responsible for the tax attributable to an item of community property income.

If the IRS denies relief, the requesting spouse taxpayer can seek Appeals Office or Tax Court review, depending on the case’s procedural situation. The nonrequesting spouse is given an opportunity to become a party to the Tax Court innocent spouse proceeding and is entitled to the notice of the hearing, if not already a party in the case. I.R.C. 6016(e)(4).

Timing of the Innocent Spouse Claim

Innocent spouse defense is a very complicated and difficult process and should be carried out by a tax attorney to ensure that the taxpayer receives the best chance at reducing or eliminating past tax debts. As outlined above, the rules and procedures by which the examining IRS agent is deciding relief involve complex questions and knowledge of intent. Because U.S. tax laws and regulations are complicated and constantly changing it is important that you obtain up to date information about the provisions that apply to you to prevent costly mistakes. To read more about the innocent spouse relief, click here: http://www.irs.gov/taxtopics/tc205.html

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