Innocent Spouse Relief

Originally published by Houston Tax Attorney.

When a husband and wife sign a joint tax return, each spouse is jointly and severally liable for all taxes relating to that year. Where one spouse does not believe he or she should be liable for the  full amount of the tax liability, that spouse may seek innocent spouse relief under IRC 6015.

Statutory Authority for Innocent Spouse Relief

Internal Revenue Code (IRC) Sec. 6015(b), 6015(c), and 6015(f) provide three potential sources of innocent spouse relief from joint and several liability.

1. 6015(b) provides general relief. Unlike 6015(c), there is no requirement for the taxpayers to be divorced or separated before making the claim.
2. 6015(c) provides relief for taxpayers that are divorced, legally separated, or have lived apart for the preceding 12 months.
3. 6015(f) provides equitable relief where neither 6015(b) or 6015(c) apply.

All three sections provide relief from a tax deficiency or understatement of tax. A deficiency or understatement of tax is the result of an IRS audit or adjustment to a tax return. Where there is tax due from an underpayment on a properly filed tax return, only equitable relief is available under 6015(f).

Examples:

Jane operated her own sole proprietor business and prepared the joint tax returns for herself and her husband John. Unbeknownst to to John, Jane was under-reporting her income and overstating her business expenses on the joint tax returns. After the IRS audited her 2014-2016 tax returns, they ended up owing $250,000 in taxes, penalties, and interest. If they are still married, John can claim relief under IRC 6015(b) or 6015(f). If they are no longer married, John can claim relief under any of the three provisions.

Same facts as above, except Jane properly reported her income and expenses on the tax returns. However, she failed to make estimated tax payments, leading to large tax liabilities each year. Eventually the back taxes accumulated to $250,000 in taxes, penalties, and interest. John can claim relief only under 6015(f).

6015(b) Relief

A spouse can claim relief from an understatement of income if several conditions are met:

1. The innocent spouse filed a joint tax return.
2. There is an understatement of tax on the joint return that is attributable to an erroneous item by the non-requesting spouse.
3. The innocent spouse did not know and had no reason to know of the understatement of tax at the time he or she signed the return.
4. It would be inequitable to hold the innocent spouse liable for the tax.
5. The spouse claims relief no later than 2 years after the IRS begins collection activities.

Knowledge Requirement

Whether the spouse claiming relief knew or should have known of the understatement is a question of fact. It is important to have a good understanding of all the facts and for the attorney to present the facts in the light most favorable to the client. The IRS examiner reviewing the claim will want to know a.) the nature of the erroneous item, b.) the financial situation of both spouses, c.) the requesting spouses’s educational background and business experience, d.) whether the requesting spouse failed to ask questions about the tax return that a reasonable person would ask, e.) the extent of involvement in the activity that gave rise to the erroneous item, and f.) whether the erroneous item represented a departure from a recurring pattern reflected in prior year returns.

Because innocent spouse claims are so fact intensive, there is room for judgment (and error) on the part of the IRS examiner. For that reason, denials of claims are often litigated in tax court. Never accept the examiner’s decision as final in such cases (or with any tax issues for that matter).

6015(c) Relief

Relief under this section is also known as “separation of liability relief.” To qualify for separation of liability relief, the following conditions must be met:

1. The spouses filed a joint tax return in the year for which relief is being sought.
2. There is an understatement of tax on the joint return that is attributable to an erroneous item by the non-requesting spouse.
3. At the time the election is filed, taxpayers are divorced, legally separated, or have lived apart for the preceding 12 months.
4. The spouse claims relief no later than 2 years after the IRS begins collection activities.

In Texas where there is no legal separation, the taxpayers must be either divorced or living apart for at least 12 months at the time of election.

6015(f) Relief

This section was added to the IRS to provide equitable relief to taxpayers who did not meet the requirements for relief under 6015(b) or 6015(c). 6015(f) can be used for understatements as well as tax return underpayments. The revenue procedure governing this code section is Rev. Proc 2013-34.

To qualify for equitable relief under IRC 6015(f), the following must be met:

1. The spouses filed a joint tax return in the year for which relief is being sought.
2. Relief is not available under IRC 6015(b) or 6015(c).
3. The claim is timely filed. Relief from unpaid tax liability must be made within the 10 years collections statute. It’s unclear why this requirement is in place – there is no need for relief if the collections statute has expired. A claim for credit or refund must be made before the refund statute of limitation which is three years from the time the return was filed or two years from the time the tax was paid, whichever is later.
4. No assets were transferred between spouses as part of a fraudulent scheme.
5. The non-requesting spouse did not transfer disqualified assets to the requesting spouse.
6. The requesting spouse did not knowingly participate in the filing of a fraudulent tax return.
7. The income tax liability is attributable to an item of the non-requesting spouse.

Streamlined Determinations

Under Rev. Proc. 2013-34, a requesting spouse may be entitled to a streamlined determination under IRC 6015(f) if the spouse is divorced, separated, or living apart for 12 months and the requesting spouse would suffer economic hardship if relief is not granted.

Post- Filing Considerations

Once an innocent spouse claim has been made, the non-requesting spouse will receive a notice and provided an opportunity to participate in any proceeding involving relief from joint and several liability.

IRS must cease all collections activities against the requesting spouse upon filing of an innocent spouse claim. However, since the IRS is prohibited from collecting, the statute of limitations is suspended while the innocent spouse claim is under consideration and for 60 days thereafter.

If the IRS denies the claim, a final determination letter will be mailed to the requesting spouse. A requesting spouse may challenge the determination in Tax Court by filing a petition within 90 days of the notice.  If the requesting spouse files suit in Tax Court, the non-requesting spouse has a right to intervene and oppose the claim.

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