Claims for innocent spouse relief are on the rise indicating that it is one of the most serious IRS tax problems faced by taxpayers. These types of IRS problems have also become some of the top litigated tax issues in the past ten years. But really, what involves a claim for innocent spouse relief? When a married couple files a joint tax return, they are jointly and severally liable for the “entire” tax regarding that return. This designation could be considered and recognized as extremely unfair to one of the spouses. For example, lottery winnings are includible in gross income. Thus, if one spouse has no knowledge of the other spouse not reporting his or her lottery winnings, the “innocent” spouse will still be separately liable for the tax liability or ensuing IRS tax debt.
Because of this unfairness, IRC § 6015, was created to allow a requesting or innocent spouse to receive tax relief in three ways:
- Tax relief is allowed from tax understatements of erroneous items of the “nonrequesting” spouse where the requesting spouse had no knowledge upon signing the return, and where it would be inequitable to hold the requesting spouse liable for the resulting deficiency (IRC § 6015(b)).
- A qualifying spouse may limit his or her liability for a deficiency from a joint return to the spouse’s allocable portion of the deficiency (IRC § 6015(c)).
- Equitable relief is available, if under the facts and circumstances, it would be inequitable to hold the innocent spouse responsible for the tax liability (IRC § 6015(f)). This is basically a last resort for an innocent spouse who does not qualify under “traditional” innocent spouse relief, found in IRC § 6015(b) or allocation of liability relief found in IRC § 6015(c).
If you are a spouse suffering from economic hardship and abuse, the IRS has been exceedingly receptive with new procedures, mainly for innocent spouse “equitable relief” under 3 above or IRC § 6015(f). Interestingly, IRC § 6015(f) itself gives no specific guidelines for determining when equitable relief should be granted, but certain revenue procedures assist in determining whether a taxpayer qualifies for IRC § 6015(f) equitable relief. The most recent is Rev. Proc. 2013-34, issued by the IRS in September 2013, which gives a roadmap of how the IRS may treat certain factors in analyzing an equitable innocent spouse relief claim, particularly the weighing of economic hardship and abuse. In addition, it reiterates elimination of the limitation period of two years after the date of the IRS’s first collection activity with respect to the requesting taxpayer for filing a claim for equitable relief.
The IRS can make a “streamlined” determination of equitable relief based on three factors:
- Marital status (divorced or legally separated from the nonrequesting spouse);
- The requesting spouse’s economic hardship if relief is not granted; and
- (Lack of) knowledge or reason to know of the understatement or underpayment of tax.
If the requesting spouse does not meet these three criteria, the IRS can make a determination of equitable relief based on the overall facts and circumstances. §4.03(2) of Rev. Proc. 2013-34 provides seven factors that the IRS uses as a guideline as to whether an innocent spouse is entitled to tax relief based on the overall facts and circumstances. However, the IRS may also look at other factors that may be relevant in making a determination. It is important to note that Rev. Proc. 2013-34 may be applied to equitable innocent spouse requests for relief filed on or after Sept. 16, 2013, as well as pending requests as of that date, which may be with the IRS, Office of Appeals, or in Federal court.
The seven threshold conditions include:
- Marital status of the requesting spouse;
- Any economic hardship the requesting spouse will suffer if relief is not granted;
- Knowledge or reason to know by the requesting spouse of the item or items giving rise to the understatement or deficiency in an understatement case and knowledge or reason to know that the nonrequesting spouse would not or could not pay the tax liability within a reasonable period of time after filing the return in an underpayment case;
- Whether the spouses have a legal obligation to pay the tax debt (i.e., due to divorce decree);
- If the requesting spouse has received a significant benefit from the unpaid tax liability or understatement;
- Whether the requesting spouse has complied with income tax laws in the years following the tax year or years to which the request for relief relates; and
- Mental or physical health of the requesting spouse.
This is not intended nor should be construed as legal advice.