Spousal Relief

Spousal Relief … from Understated Tax Liability

Congress has authorized “Innocent Spouse Relief” for qualifying spouses to relieve them from certain joint and several tax liability related to an understated tax deficiency.  26 U.S.C. § 6015(a)(1).  Through the “Innocent Spouse Relief” program, the Requesting Spouse can be relieved of responsibility for paying any additions to tax, interest, and penalties if the Non-Requesting Spouse improperly reported items or omitted items on the joint tax return.  The tax, interest, and penalties that qualify for relief can only be collected from the Non-Requesting Spouse after Innocent Spouse Relief is granted.  However, the Requesting Spouse remains jointly and individually responsible for any tax, interest, and penalties that does not qualify for Innocent Spouse Relief.  The IRS can collect these amounts from either the Requesting Spouse or the Non-Requesting Spouse when Innocent Spouse Relief is denied.  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.   

Innocent Spouse Relief only applies to individual income or self-employment taxes.  For example, household employment taxes, individual shared responsibility payments, and business taxes and trust fund recovery penalty for employment taxes are not eligible for Innocent Spouse Relief.  See IRM § 25.15.3.6 (12-12-2016) (household employment taxes).  Furthermore, Innocent Spouse Relief does not apply to unpaid taxes shown on IRS Form 1040. 

Innocent Spouse Relief will not be granted if the IRS proves the Requesting Spouse and the Non-Requesting Spouse transferred property to one another as part of a fraudulent scheme.  A fraudulent scheme includes a scheme to defraud the IRS and/or another third party, such as a creditor, former spouse, or business partner.  26 C.F.R. § 1.6015-1(d). 

The collection statute expiration date (“CSED”) is affected by a taxpayer’s request for Innocent Spouse Relief.  The statute of limitations on collection of assessments for taxpayers who request relief under 26 U.S.C. § 6015(b), (c) or (f) is suspended during the pendency of the taxpayer’s claim for the time that the IRS is prohibited from engaging in certain collection activities plus 60 days.  See 26 U.S.C. § 6015(e)(2).

A Requesting Spouse could be eligible for a refund if relief is granted and the Requesting Spouse can prove that the Requesting Spouse actually paid any tax that is subject to relief.  For example, the Requesting Spouse paid $5,000 of tax liability for which the Requesting Spouse was subsequently granted Innocent Spouse Relief.  26 U.S.C. § 6015(g).  A Requesting Spouse is only eligible for a refund if granted Innocent Spouse Relief or Equitable Relief.  A Requesting Spouse is not eligible for a refund if granted Separation of Liability Relief.  26 U.S.C. § 6015(g)(3); 26 C.F.R. § 1.6015-3(c)(1). 

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 (5th Cir. 2002).  First, the Requesting Spouse must have filed a joint return.  Second, there must be an “understated” tax on the return that is due to “erroneous items” of the Non-Requesting Spouse.  Third, the Requesting Spouse must show that when the Requesting Spouse signed the joint return the Requesting Spouse “did not know, and had no reason to know,” that the understated tax existed (or the extent to which the understated tax existed).  Fourth, it would be unfair to hold the Requesting Spouse liable for the understated tax after considering all the facts and circumstances.  Fifth, the Requesting Spouse must elect Innocent Spouse Relief “not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the [Requesting Spouse].”  26 U.S.C. § 6015(b)(1)(E).  Each of the five conditions is discussed separately in more detail below.

Eligibility for Equitable Relief:

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 (5th Cir. 2002).  First, the Requesting Spouse must have filed a joint return.  Second, there must be an “understated” tax on the return that is due to “erroneous items” of the Non-Requesting Spouse.  Third, the Requesting Spouse must show that when the Requesting Spouse signed the joint return the Requesting Spouse “did not know, and had no reason to know,” that the understated tax existed (or the extent to which the understated tax existed).  Fourth, it would be unfair to hold the Requesting Spouse liable for the understated tax after considering all the facts and circumstances.  Fifth, the Requesting Spouse must elect Innocent Spouse Relief “not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the [Requesting Spouse].”  26 U.S.C. § 6015(b)(1)(E).  Each of the five conditions is discussed separately in more detail below.

Condition #1: Joint Tax Return

The Requesting Spouse must have filed a joint return. 26 U.S.C. § 6015(b)(1)(A). 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).

Condition #2: Understated Tax Due to Erroneous Items

There must be an “understated” tax on the return that is attributable to “erroneous items” of the Non-Requesting Spouse. 26 U.S.C. § 6015(b)(1)(B). Attribution to the Non-Requesting Spouse is a critical factor. Items attributable to the Requesting Spouse do not qualify for relief. The Requesting Spouse cannot be relieved of tax on the Requesting Spouse’s own items, including joint items, under 26 U.S.C. § 6015(b). IRM § 25.15.3.7.2 (12-12-2016).

Condition #3: Did Not Know, and No Reason to Know of Understatement

The Requesting Spouse must show that when the Requesting Spouse signed the joint tax return the Requesting Spouse “did not know, and had no reason to know,” that the understated tax existed (or the extent to which the understated tax existed) at the time the return was signed. 26 U.S.C. § 6015(b)(1)(C); 26 C.F.R. § 1.6015-2(c); IRM § 25.15.3.7(1) (12-12-2016); see Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002). What is the meaning of the phrases “actual knowledge” and “reason to know”? The Requesting Spouse knew or had reason to know of an understated tax if: (a) the Requesting Spouse actually knew of the understated tax, or (b) a reasonable person in similar circumstances would have known of the understated tax. 26 C.F.R. § 1.6015-2(c).

Condition #4: Equity

A Requesting Spouse seeking Innocent Spouse Relief must demonstrate that it would be inequitable to hold the Requesting Spouse jointly and severally liable for the understated tax. 26 U.S.C. § 6015(b)(1)(D). All facts and circumstances are considered in determining whether it is inequitable to hold the Requesting Spouse jointly and severally liable for an understatement. 26 C.F.R. § 1.6015-2(d). The following are examples of factors the IRS will consider: (a) whether the Requesting Spouse significantly benefited, directly or indirectly, from the understatement; (b) whether the Non-Requesting Spouse deserted the Requesting Spouse; (c) whether the Requesting Spouse and the Non-Requesting Spouse have been divorced or separated; and (d) whether the Requesting Spouse received a benefit on the return from the understated tax. 26 C.F.R. § 1.6015-2(d); see also IRM § 25.15.3.7.4(2) (12-12-2016).

Condition #5: Timely Filed Request

The Requesting Spouse must elect Innocent Spouse Relief “not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the [Requesting Spouse].” 26 U.S.C. § 6015(b)(1)(E).

Complicated? You bet.

You should have a tax attorney on your side. Don’t battle the IRS without the guidance and support of a qualified tax lawyer. Tap into Attorney Schaller’s 35+ years of legal experience. He wrote the book on erasing or reducing IRS back-taxes.

Contacting the Schaller Law Firm is free.  IRS Tax problems can seem daunting and overwhelming.  Getting a free Q&A consultation is the perfect place to start.  Book an appointment with the convenient online booking system.