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Innocent Spouse Relief

Pursuant to Internal Revenue Code Section 6013(d)(3), married taxpayers who file a joint tax return are jointly and severally liable for the taxes stemming from the joint return, meaning each spouse is individually responsible for paying the entire amount due. Due to this provision, a spouse could be held liable for taxes and penalties that relate to items on a joint tax return that he or she had no knowledge about. Pursuant to IRC Section 6015, however, an innocent spouse may have three options for relief. If the tax liability is relieved under Section 6015, the related penalties and interest are also relieved.

Innocent Spouse Relief

According to IRC Section 6015(b), innocent spouse relief is available if:

  1. A joint return was filed;
  2. On that return there is an understatement of tax attributable to erroneous items of one spouse;
  3. The innocent spouse establishes that he or she did not know, and had no reason to know, that there was such an understatement;
  4. It is inequitable to hold the innocent spouse liable for the understatement; and
  5. The innocent spouse files Form 8857, Request for Innocent Spouse Relief, within 2 years after the IRS has begun collection activities for the understatement.

If the innocent spouse was aware of some of the understatement, he or she may still be relieved of the portion of liability that he or she had no idea about pursuant to Section 6015(b)(2). To be relieved of that portion of the liability, the innocent spouse must establish that he or she did not know, and had no reason to know, the extent of the understatement.

Section 6015(b) only allows relief from an understatement or a deficiency. It does not allow for relief from an underpayment of income tax. While the IRS will not continue to pursue a spouse who makes a successful innocent spouse claim, the IRS may collect taxes from community property and other jointly owned property.

Separation of Liability Relief

If a taxpayer cannot meet the traditional innocent spouse relief requirements, separation of liability relief may be an option. Under Section 6015(c), taxpayers who have separated from their spouse can file a separate liability election. This election must be made within two years after the date the IRS begins collection activities on the taxpayer making the election. Taxpayers may make this election if:

  1. The taxpayer and his or her spouse filed a joint tax return; and
  2. At the time the separate liability election is filed, the taxpayer making the election is no longer married to, or is legally separated from, his or her spouse; OR
  3. The taxpayer making the election was not a member of the same household as the spouse at any time during the 12-month period ending on the date the election is filed.

Like Section 6015(b), Section 6015(c) only allows relief from an understatement or a deficiency. It does not allow for relief from an underpayment of income tax. Unlike the traditional innocent spouse relief, however, the burden is on the IRS to show that the taxpayer had actual knowledge of the items leading to the deficiency. In other words, a spouse who was disqualified from traditional innocent spouse relief for having had a reason to know of the problematic items may receive relief under this provision, so long as he or she did not have actual knowledge of such items.

Equitable Relief

The third and final option is equitable relief. Under Section 6015(f), the IRS may grant equitable relief if, “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency.” The following are the conditions for equitable relief:

  1. The requesting spouse is not eligible for traditional innocent spouse relief under Section 6015(b) nor the separation of liability relief under Section 6015(c);
  2. A joint tax return was filed;
  3. The request for relief is filed within:
    1. 10 years after the IRS assesses the tax; and
    2. 3 years after the return was filed or 2 years from when the tax was paid, whichever is later;
  4. Assets were not transferred between the spouses as part of a fraudulent scheme;
  5. The nonrequesting spouse did not transfer assets to the requesting spouse for the purpose of avoiding taxes. (If such a transfer was made, relief will be limited to the amount of income tax liability that exceeds the value of the transferred assets);
  6. The requesting spouse did not knowingly participate in filing a fraudulent return; and
  7. The tax liability from which the requesting spouse seeks relief is due to tax items of the nonrequesting spouse.

The IRS will consider all relevant facts and circumstances to determine whether it would be inequitable to hold the requesting spouse liable for all or part of the unpaid tax liability. Some of the factors the IRS will consider are:

  1. Is the requesting spouse no longer married to the nonrequesting spouse? If they are still married, this factor will be neutral.
  2. Will the requesting spouse suffer economic hardship if relief is not granted?
  3. Did the requesting spouse know or have reason to know of the tax item that caused the deficiency at the time he or she signed the tax return?
    1. Factors that the IRS will consider to determine whether he or she had reason to know of the tax item that caused the tax deficiency include:
      1. Level of education;
      2. Any deceit or evasiveness of the nonrequesting spouse;
      3. Degree of involvement in the activity generating the tax liability;
      4. Involvement in business and household financial matters;
      5. Business and financial expertise; and
      6. Any lavish or unusual expenditures compared to prior years.
  4. Was the requesting spouse a victim of abuse?
  5. Did the requesting spouse receive a significant benefit from the unpaid liability or the tax item that caused the deficiency?
  6. Has the requesting spouse made a good faith effort to comply with the tax laws since the tax year in which the deficiency/unpaid tax arose?
  7. Was the requesting spouse in poor physical or mental health at the time he or she signed the returns?

Requesting innocent spouse relief can be onerous due to the complex rules involved and the significant substantiation required. If you believe you may be entitled to innocent spouse relief, the tax attorneys at the Ben-Cohen Law Firm can help you. Please call us at (310) 272-7600 to set up a consultation. We will review your options with you and answer any questions you may have. You may also contact us by completing our online form.

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