Equitable Tax Relief for Spouses

Equitable Tax Relief … when Justice Demands Relief

Equitable tax relief is available to spouses who establish that under all the facts and circumstances, it would be unfair to hold the spouse liable for the deficiency or underpayment of tax. The Requesting Spouse must meet ALL five (5) conditions to qualify for Innocent Spouse Relief. 26 U.S.C. § 6015(b); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5^th Cir. 2002).

The United States Congress has authorized Equitable Tax Relief for qualifying women to relieve them from certain joint and several tax liability related to a tax deficiency and/or underpayment of tax liability. 26 U.S.C. § 6015(f). Equitable Relief also applies to penalties and interest when relief is granted for the underlying item. IRM § 25.15.12.20.3(5) (10-28-2014).  Equitable Relief may be granted from a fraud penalty.  See Aranda v. Comm. of Internal Revenue, 432 F.3d 1140, 1143 (10^th Cir. 2005). Unlike Innocent Spouse Relief and Separation of Liability Relief, Equitable Relief is the only relief offered by 26 U.S.C. § 6015 that could eliminate tax liability shown on a taxpayer’s IRS Form 1040.

A woman may be relieved from such liability if the IRS determines it is inequitable to hold the that woman liable for any deficiency or unpaid tax (or any portion of either). 26 U.S.C. § 6015(f)(1). The IRS has the discretion to grant Equitable Relief from joint and several liability to a woman when, considering all of the facts and circumstances, it would be inequitable to hold the woman jointly and severally liable.  26 C.F.R. § 1.6015-4(a).  A note about language: the ex-wife or soon-to-be ex-wife seeking relief from the IRS is identified as the “Requesting Spouse”; the other spouse will be identified as the “Non-Requesting Spouse” – whether married, separated, or divorced.   

Equitable Relief applies to both “understatements” and “underpayments” of tax liability. IRM § 25.15.3.9.1(1) (03-08-2013). Understatements are liabilities from a deficiency assessment; underpayments are unpaid self-assessed taxes on original or amended returns.  IRM § 25.15.3.9.1(1) (03-08-2013). This is the only provision under 26 U.S.C. § 6015 that provides relief for underpayments. IRM § 25.15.3.9.1(2) (03-08-2013). Equitable Relief also apples to penalties, additions to tax, and interest where relief is granted for the underlying tax. IRM § 25.15.3.9.1(6) (03-08-2013). But Equitable Relief is not available when a Requesting Spouse pays the tax with a late-filed return because there is no underpayment of tax; consequently, the Requesting Spouse is not eligible for Equitable Relief from interest and penalties caused by the late return filing. IRM § 25.15.3.9.1(6) (03-08-2013). 

Section 6015(f) states that Equitable Relief is not available to taxpayers who are eligible for Innocent Spouse Relief or Separation of Liability Relief. 26 U.S.C. § 6015(f)(2). But Treasury Regulation § 1.6015-4, 26 C.F.R. § 1-6015-4, appears to narrow that limitation and only prohibits Equitable Relief for those taxpayers who do not qualify for full relief from Innocent Spouse Relief or Separation of Liability Relief.  26 C.F.R. § 1.6015-4(a). A Requesting Spouse who files a joint return for which a liability remains unpaid and who does not qualify for full relief from Innocent Spouse Relief or Separation of Liability Relief may request Equitable Relief. 26 C.F.R. § 1.6015-4(a). Therefore, it may be argued that a Requesting Spouse who is eligible for partial relief of a tax liability from Innocent Spouse Relief or Separation of Liability Relief may also be eligible for Equitable Relief of the remaining liability. See IRS Topic No. 205 for more information.

Eligibility for Equitable Relief:

A Requesting Spouse must satisfy all threshold conditions to be eligible to submit a request for Equitable Relief under 26 U.S.C. § 6015(f). Rev. Proc. 2013-34. The IRS may relieve a Requesting Spouse who satisfies all the applicable threshold conditions set forth below of all or part of the income tax liability under 26 U.S.C. § 6015(f) if, taking into account all the facts and circumstances, the IRS determines that it would be inequitable to hold the Requesting Spouse liable for the income tax liability. Pullins v. Comm. of Internal Revenue, 136 T.C. 432, 438 (2011).

Rev. Proc. 2013-34 identifies the seven (7) threshold conditions as follows: (1) the Requesting Spouse filed a joint return for the taxable year for which relief is sought; (2) full relief is not available to the Requesting Spouse under 26 U.S.C. § 6015(b) or 26 U.S.C. § 6015(c) [i.e. Innocent Spouse Relief or Separation of Liability Relief]; (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme by the spouses, including a scheme to defraud the IRS and/or another third party, including but not limited to, creditors, ex-spouses, and business partners [IRM § 25.15.3.8.2.2(2) (12-12-2016); see 26 C.F.R. § 1.6015-1(d)]; (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 joint return; and (7) the income tax liability from which the Requesting Spouse seeks relief is attributable (either in full or in part) to an item of the Non-Requesting Spouse or an underpayment resulting from the Non-Requesting Spouse’s income. Rev. Proc. 2013-34, § 4.01.

Condition #1: Joint Tax Return

The Requesting Spouse must have filed a joint return for the taxable year for which relief is sought. It is easy to verify that the Requesting Spouse filed a joint return for the taxable year for which relief is sought. The Requesting Spouse can utilize an IRS tax transcript to prove the point.

Condition #2: Full Relief Not Otherwise Available

Equitable Relief is not available to a Requesting Spouse under 26 U.S.C. § 6015(f) who is simultaneously qualified for full Innocent Spouse Relief under 26 U.S.C. § 6015(b) or full Separation of Liability Relief under 26 U.S.C. § 6015(c).

Condition #3: Timely Filed Request

The claim for Equitable Relief must be timely filed. This issue is explored more fully in the chapter titled “Premature and Untimely Claims.” But what are the rules for timely filing a claim for Equitable Relief? If the Requesting Spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made on or before the Collection Statute Expiration Date (CSED). IRM § 25.15.3.9.2.1(3) (07-29-2014). The CSED is the date the period of limitation on collection of income tax liability expires as provided in 26 U.S.C. § 6502. The CSED generally expires 10 years after the assessment of tax, but it may be extended by other provisions of the Tax Code. Claims for credit or refund of amounts paid must be made before the expiration of the period of limitation on credit or refund, as provided in 26 U.S.C. § 6511. Generally, that period expires three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

Condition #4: No Fraudulent Transfers

A Requesting Spouse is not eligible for Equitable Relief if assets were transferred between the spouses as part of a fraudulent scheme by the spouses. A fraudulent transfer scheme includes a scheme to defraud the IRS and/or another third party, including but not limited to, creditors, ex-spouses, and business partners. IRM § 25.15.3.8.2.2(2) (12-12-2016); see 26 C.F.R. § 1.6015-1(d). Acts discussed in the Separation of Liability Relief chapter that would disqualify the Requesting Spouse from requesting allocation under 26 U.S.C. § 6015(c) also disqualify the Requesting Spouse from Equitable Relief. IRM § 25.15.3.9.2.1(4) (07-29-2014).

Condition #5: No Disqualified Assets

Eligibility for Equitable Relief is conditioned upon the Non-Requesting Spouse NOT transferring “disqualified assets” to the Requesting Spouse. For this purpose, the term “disqualified asset” has the meaning given the term by 26 U.S.C. § 6015(c)(4)(B). If the Non-Requesting Spouse transferred disqualified assets to the Requesting Spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets. Even if there was a transfer of disqualified assets, the Requesting Spouse may be eligible for relief if the Non-Requesting Spouse abused the Requesting Spouse or maintained control over the household finances by restricting the Requesting Spouse’s access to financial information, or the Requesting Spouse did not have actual knowledge that disqualified assets were transferred. Rev. Proc. 2013-34, § 4.01.

Condition #6: No Fraudulent Tax Return

A Requesting Spouse is not eligible for Equitable Relief if the Requesting Spouse knowingly participated in the filing of a fraudulent joint return.

Condition #7: Liability is Attributable to Non-Requesting Spouse

Eligibility for Equitable Relief is conditioned upon the income tax liability from which the Requesting Spouse seeks relief being attributable (either in full or in part) to an item of the Non-Requesting Spouse or an underpayment resulting from the Non-Requesting Spouse’s income. If the liability is partially attributable to the Requesting Spouse, then relief can only be considered for the portion of the liability attributable to the Non-Requesting Spouse.

Complicated? You bet.

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