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Innocent Spouse Protection

An individual will be relieved of liability for income tax (including interest, penalties and other amounts) for a tax year to the extentthe tax liability is attributable to an understatement (understatement and tax deficiency are synonymous) described below:

1. A joint return was filed for the tax year [IRC §6015(b)(1)(A)]
2. There is an understatement of tax on the return that is attributable to an erroneous item by the other spouse [IRC §6015(b)(1)(B)]
3. A taxpayer / spouse establishes that in signing the return he/she did not know and had no reason to know of the understatement; [IRC §6015 (b)(1)(C)
4. Taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer / spouse liable for the deficiency attributable to the understatement; [IRC §6015(b)(1)(D)]
5. A taxpayer / spouse elects the benefits of this provision, on the form that the IRS prescribes (Form 8857) , no later than the date that is two years after the date the IRS has begun collection activities with respect to the taxpayer. [IRC §6015(b)(1)(E)]

Knowledge: If an individual / spouse who otherwise qualifies for innocent spouse relief fails to establish that he/she did not know or have reason to know of the understatement, but does establish that he/she did not know or have reason to know the extent of the understatement, that individual / spouse may be relieved of liability for tax, penalties and interest to the extent that liability is attributable to the portion of the understatement that he/she did not know or have reason to know.

Election Of Separate Liability: The Act also provides a separate liability election for a taxpayer / spouse who, at the time of the election, is no longer married to including widowed, is legally separated from, or has been living apart for at least 12 months from the person with whom the taxpayer / spouse originally filed a joint tax return.

Divorced, Separated or Living Apart: An individual/spouse is eligible to make the separate liability election only if at the time the election is filed he/she is no longer married to including widowed, or is legally separated from, the spouse from whom the joint return to which the election relates was filed; or he/she was not a member of the same household as the spouse with whom the joint tax return was filed at any time during the twelve month period ending at the date the election is filed [IRC §6015(c)(3)(A)(i)].

Equitable Relief: The new innocent spouse rules focus mainly on tax "deficiencies," as opposed to balances shown as due on joint returns but simply never paid. One portion of the new rules offers at least the hope of some relief for any balance due with respect to a joint return, even when relief would not be other-wise available. Specifically, new §6015(f) permits the IRS to waive "any unpaid tax or deficiency (or any portion of either)," if in light of all the facts and circumstances "it is inequitable to hold the individual liable." The IRS was directed to adopt implementing rules, which it did on January 31, 2000, when it issued Rev. Proc. 2000-15. The Rev. Proc. contains two items which warrant close review. First is a list of "threshold conditions" which must be satisfied by all claims for equitable relief, and the second is a list of conditions "under which relief under §6015(f) will ordinarily be granted.

The threshold conditions are found in §4.01, and can be summarized as follows:

• A joint return was filed. Relief is not available under §6015(b) or §6015(c).
• The requesting spouse applies for relief no later than two years after the date of the first collection action against her after July 22, 1998.
• The liability remains unpaid (except that a refund will be considered for payments made after July 22, 1998, and before April 15, 1999).
• No assets were transferred between the spouses as part of a fraudulent scheme.
• No disqualified assets were transferred to the requesting spouse by the nonrequesting spouse.
• The requesting spouse did not file the return in question with fraudulent intent.
• Even if these threshold conditions are met, of course, it must still be shown that holding the requesting spouse liable would be "inequitable."

What the IRS thinks is "inequitable" can be better understood by considering the kind of case in which Rev. Proc. 2000-15 suggests relief would ordinarily be granted. Such a case would include the following facts:

1. The spouses are no longer married (i.e. due to divorce or death), or have been separated for 12 months or more.
2. When the requesting spouse signed the return in question she did not know and had no reason to know that the tax would not be paid.
3. The requesting spouse would suffer economic hardship if relief is not granted.

If these conditions are met, relief will be granted to the extent that the tax relates to items attributable to the non-requesting spouse. However, a spouse might still qualify for relief even if the facts are not on all fours with those listed above.

Rev. Proc. 2000-15 states that the following factors would influence the decision:

1. Marital status. A spouse who is divorced or separated will find it easier to obtain equitable relief than one who is still married to and living with the spouse with whom the joint return was filed. Furthermore, spousal abuse is also considered. (Abuse amounting to duress in signing the return can be used to overcome the joint filing election by showing that the election was not freely and voluntarily made in the first place.)
2. No knowledge or reason to know. Though not a "thresh-old" condition, a spouse's claim for equitable relief is advanced if she can show that she did not know and had no reason to know that the tax would not be paid, or that the tax return contained errors giving rise to the deficiency at issue, and that such errors were attributable solely to the non-requesting spouse.
3. Spouse's legal obligation. The IRS position is that a claim for equitable relief is bolstered if it can be shown that the payment of the taxes was the legal obligation of the other spouse pursuant to a divorce decree. In the past, even where one spouse agrees to pay the joint taxes for years prior to the divorce, this was in no sense binding on the IRS, and collection of the joint IRS Debt could be sought from either spouse. Thus, making this as a factor in determining the appropriateness of equitable relief will help many former wives whose ex-husbands have failed to pay pre-divorce income taxes which they were required to pay under the terms of their divorce decrees.
4. Economic hardship. As suggested by the fact pattern in which the IRS has announced that relief will ordinarily be granted, a showing of economic hardship is an important factor. The standards to be used in determining whether the payment of the taxes would cause an economic hardship are the same as those used to determine whether a levy should be withdrawn as set forth in Treas. Regs. §301.6343-1(b)(4). The question is whether enforcement would render the taxpayer "unable to pay his or her reasonable basic living expenses."

Conversely, the absence of the above-listed conditions would weigh against the granting of equitable relief. In addition, Rev. Proc. 2000-15 states that certain other factors would make it more difficult to obtain relief. These include the failure to comply with the requesting spouse's filing or tax payment obligations for years after the year or years for which relief is being sought.

Conclusion: The new innocent spouse rules are a vast improvement over the situation prior to the enactment of the IRS Restructuring and Reform Act of 1998. The IRS, however, has taken every opportunity to interpret the new rules as narrowly as possible. This is especially true of the "equitable" relief provisions of §6015(f), which Congress meant to cover cases which didn't fit the other two forms of innocent spouse protection. In the face of this administrative reluctance to allow relief if there is any conceivable way to avoid it, the successful and timely assertion of an innocent spouse claim requires creativity, diligence, and a complete understanding of the Code and the IRS's implementing pronouncements.

Do you qualify as an Innocent Spouse? Call for a consultation. Find Out.

An Innocent Spouse Petition is an extremely difficult process. You may also be eligible for an IRS Offer in Compromise, IRS Penalty Abatement or you may be Currently Uncollectible. Our Tax Attorneys at Flat Fee Tax Service will pursue the path that will be best for you.

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