Separation of Liability Tax Relief … Making Your “Ex” Pay the IRS Deficiency
Congress has authorized Separation of Liability Tax Relief for qualifying spouses to relieve them from certain joint and several tax liability related to a tax “deficiency.” 26 U.S.C. § 6015(c). The Tax Code defines “deficiency,” generally, as the amount by which the tax imposed by IRS Subtitle A (income taxes) exceeds the tax amount shown on the taxpayer’s IRS Form 1040 return. 26 U.S.C. § 6211(a). The procedures to separate liability are set forth in 26 U.S.C. § 6015(c) and Rev. Proc. 2013-34. Note that throughout this and the next few chapters, the spouse 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.
Separation of Liability Relief provides for the separate allocation of any tax “deficiency” owed between the Requesting Spouse and the Non-Requesting Spouse when an erroneous item was not reported properly on a joint return. 26 U.S.C. § 6015(c). Pursuant to the Separation of Liability Relief statute, the understated tax liability (plus interest and penalties) on the joint return is allocated between the Requesting Spouse and the Non-Requesting Spouse. Separation of Liability Relief granted to a Requesting Spouse is determined by allocation of items giving rise to the deficiency, if all other criteria are met. Allocation is determined by attributing each item adjusted to one or both spouses. The understated tax allocated to the Requesting Spouse is generally the amount for which the Requesting Spouse is responsible and remains jointly and severally liable. 26 C.F.R. § 1.6015-3(d)(1)(i). The Requesting Spouse is relieved of liability for understated tax not attributed or allocated to the Requesting Spouse. Items which may be attributed to both spouses can be allocated fifty percent (50%) to each spouse. IRM § 25.15.3.8(3) (12-12-2016). Examine the conditions presented below.
Allocation of Deficiency in Separation of Liability Relief
A Separation of Liability Relief election to allocate an IRS deficiency limits the Requesting Spouse’s liability to that portion of the deficiency allocated to the Requesting Spouse pursuant to 26 U.S.C. § 6015. 26 C.F.R. § 1.6015-3(d)(1)(i). The Requesting Spouse is then relieved of the former joint and several liability as to the deficiency allocated to the Non-Requesting Spouse. Generally, the Requesting Spouse may not be relieved of any part of a deficiency which relates to an item attributable to the Requesting Spouse. IRM § 25.15.3.8.2.4(1) (12-12-2016).
For Separation of Liability Relief purposes, the general rule is that liability for erroneous items identified on the IRS’ notice of deficiency is allocated to the spouses as if separate returns had been filed originally. 26 U.S.C. § 6015(d)(3)(A); 26 C.F.R. § 1.6015-3(d)(2). Congress provided four exceptions to the allocation rule identified below. 26 U.S.C. § 6015(d)(3)(A); 26 C.F.R. § 1.6015-3(d)(2).
Burden of Proof in Separation of Liability Relief
The Requesting Spouse has the burden to prove that the he/she meets the qualifications for an election of Separation of Liability Relief. The Requesting Spouse must establish the basis for allocating the erroneous items. 26 U.S.C. § 6015(c)(2); 26 C.F.R. § 1.6015-3(d)(3). The Requesting Spouse bears the burden of proof in establishing his/her allocated portion of the liability. IRM § 25.15.3.8.2.3 (12-12-2016). The Requesting Spouse must prove that the items giving rise to an understatement are attributable to the Non-Requesting Spouse. IRM § 25.15.3.8.2.3 (12-12-2016). IRS examiners should base their determination on the credibility of the Requesting Spouse if IRS efforts to retrieve the administrative file are unsuccessful, and no other corroborating evidence is available to determine attribution of the erroneous items. IRM § 25.15.3.8.2.3 (12-12-2016).
However, the Requesting Spouse does not have the burden to prove the absence of “actual knowledge” of erroneous items causing the tax deficiency. Similarly, the Requesting Spouse does not have the burden to prove the absence of fraudulent asset transfers. 26 U.S.C. § 6015(c)(2); 26 U.S.C. § 6015(d)(3); 26 C.F.R. § 1.6015-3(d)(3); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002). These burdens fall on the IRS. See 26 U.S.C. § 6015(c)(2); 26 U.S.C. § 6015 (c)(3)(C); 26 C.F.R. § 1.6015-3(c)(2)(i) & (c)(3)(iii); IRM § 25.15.3.8.2.1(1) (12-12-2016); IRM § 25.15.3.8.2.1(2) (12-12-2016); IRM § 25.15.3.8.2.3 (12-12-2016); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002).
Condition #1: Marital Status
The Requesting Spouse seeking separation of liability relief must meet the following requirement as of the time the IRS is filed: (a) the Requesting Spouse was widowed from, was no longer married to, or was legally separated from, the Non-Requesting Spouse with whom the Requesting Spouse filed the joint return for which the Requesting Spouse is requesting relief; or (b) the Requesting Spouse was not a “member of the same household” as the Non-Requesting Spouse with whom the Requesting Spouse filed the joint return at any time during the 12-month period ending on the date the Requesting Spouse filed Form 8857. 26 U.S.C. § 6015(c); see Rubel v. Comm. of Internal Revenue, 856 F.3d 301, 303 (3rd Cir. 2017). A Requesting Spouse may elect Separation of Liability Relief if the Requesting Spouse is no longer married to the Non-Requesting Spouse or is legally separated from the Non-Requesting Spouse with whom the Requesting Spouse filed the joint return at issue. 26 U.S.C. § 6015(c)(3)(A)(i)(I); 26 C.F.R. § 1.6015-3(a); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002). A determination of whether a taxpayer is married, divorced, or legally separated is made in accordance with 26 U.S.C. § 7703. 26 C.F.R. § 1.6015-3(b)(1) & (2). The marital status is determined at the time the Requesting Spouse elects Separation of Liability Relief. 26 U.S.C. § 6015(c)(3)(A)(i)(I). However, the marital status relative to deceased taxpayer will be determined on the earlier of the date of the election or the date of death in accordance with 26 U.S.C. § 7703(a)(1). 26 C.F.R. § 1.6015-3(a); see IRS Publication 971, Innocent Spouse Relief, pg. 3 (An executor “may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive.”); but see Jonson v. Comm. of Internal Revenue, 353 F.3d 1181, 1183 (10th Cir. 2003) (the estate of decedent is not eligible for Separation of Liability Relief because the estate is not an “individual.”).
A Requesting Spouse may elect Separation of Liability Relief if the Requesting Spouse was not a member of the same household as the Non-Requesting Spouse with whom the Requesting Spouse filed the joint return at issue. 26 U.S.C. § 6015(c)(3)(A)(i)(II). The Requesting Spouse must not have been a member of the same household at any time during the 12-month period ending on the date the Requesting Spouse elects Separation of Liability Relief. 26 U.S.C. § 6015(c)(3)(A)(i)(II). The Requesting Spouse and the Non-Requesting Spouse are not members of the same household if the Requesting Spouse is living apart and is estranged from the Non-Requesting Spouse. However, the Requesting Spouse and the Non-Requesting Spouse are considered members of the same household if any of the following conditions are met: (a) the Requesting Spouse and the Non-Requesting Spouse reside in the same dwelling; (b) the Requesting Spouse and the Non-Requesting Spouse reside in separate dwellings but are not estranged, and one spouse is temporarily absent from the other’s household; or (c) either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse’s return. 26 C.F.R. § 1.6015-3(b)(3). Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. 26 C.F.R. § 1.6015-3(b)(3).
Condition #2: Timely Filed Election
To elect Separation of Liability Relief, the Requesting Spouse must file IRS Form 8857, Request for Innocent Spouse Relief. The Requesting Spouse must make a timely election. A Separation of Liability Relief election may be made at any time after the IRS asserts a deficiency for any tax year but not later than 2 years after the date on which the IRS has begun collection activities with respect to the individual making the election. 26 U.S.C. § 6015(c)(3)(B).
Condition #3: Joint Tax Return
The Requesting Spouse seeking separation of liability relief must have filed a joint return. 26 U.S.C. § 6015(c)(1). The Requesting Spouse must prove that a joint return was filed. This condition is easily proved by obtaining an IRS tax transcript. The Requesting Spouse’s IRS tax transcript would prove that the joint return was filed. Note that a Substitute for Return (SFR) filed by the IRS per 26 U.S.C. § 6020(b) might not qualify. See IRM § 25.15.3.5 (12-12-2016).
Complicated? You bet.
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