“But It’s Not My Fault” How to Obtain Innocent Spouse Relief
By: Heather L. Marello
Married taxpayers often file their annual income tax returns electing “married filing joint” status. While often beneficial from a tax perspective, spouses rarely understand that, by electing this status, each spouse agrees to be liable for the entire amount due for that year – whether it is the liability reported as due on the return or a deficiency subsequently determined from the IRS. This means that the IRS can collect an amount due on a joint return entirely from either spouse, or from a combination of both. More often than not, this does not become an issue. However, when circumstances change, such as a separation, divorce, or other life event, or if a large deficiency becomes due as the result of audit adjustments to one spouse’s flow-through entity, innocent spouse relief can be an effective form of protection.
The Innocent Spouse Provisions:
I.R.C. Section 6015 can afford innocent spouse relief to a spouse who filed a joint return under three separate sub-provisions – (b), (c), and (f). While the Internal Revenue Manual instructs its agents to consider all three provisions in every request for relief, practitioners should be aware of the distinctions and which provision is most likely to be successful for their clients.
Section 6015(b) relief is available if (1) there is an understatement (deficiency) in tax on the joint return; (2) the understatement is attributable to the non-requesting spouse; (3) the requesting spouse did not know or have reason to know of the error(s) giving rise to the deficiency; and (4) it would be inequitable to hold the requesting spouse liable for the understatement. If relief is granted under this provision, the requesting spouse is fully relieved of the deficiency.
Relief under Section 6015(c) is similarly limited to an understatement (deficiency) in tax on a joint return that is attributable to the non-requesting spouse. The knowledge factor under this subsection is limited to whether the requesting spouse had actual knowledge of the error(s) giving rise to the understatement of tax (as opposed to actual or constructive knowledge under subsection (b)), and there is no determination as to whether it would be inequitable to hold the requesting spouse liable for the understatement. However, to qualify for relief under subsection (c), the requesting spouse must be either (a) divorced; (b) widowed; (c) legally separated; or (d) living apart from their spouse for at least twelve months. If relief is granted under this provision, liabilities are allocated between the two spouses as if they had filed separate returns.
Section 6015(f) is an equitable provision that may be applied if the requesting spouse does not qualify for relief under either section (b) or (c), above. This provision affords an opportunity for relief if there is either an understatement (deficiency) in tax on the joint return or an underpayment of the amount shown as due on the filed return. The examining agent considers a number of factors in determining whether to grant relief, though no one factor is dispositive. Those factors include inter alia, (1) the requesting spouse’s marital status; (2) whether denying relief will impose an economic hardship on the requesting spouse; (3) whether the requesting spouse had knowledge or reason to know (a) of the error(s) giving rise to the deficiency or (b) that the tax shown as due on the return would not be paid within a reasonable time; (4) whether the requesting spouse complied with his or her filing and payment obligations in subsequent years; (5) whether the requesting spouse has a legal obligation to pay the tax (i.e. through a divorce or separation agreement); (6) whether the requesting spouse was abused by the non-requesting spouse; and (7) whether the requesting spouse had a mental or physical health issue during the years in which relief is requested. If relief is granted under this provision, the requesting spouse is fully relieved of the deficiency or underpayment.
Procedure for Relief:
A taxpayer requesting relief under Section 6015(b) or (c) must do so within two years of the date the IRS begins collection activity with respect to the liability. The term “collection activity” includes activities such as issuing a final notice of intent to levy (or actually levying property), offsetting a requesting spouse’s refund against a prior joint liability, or filing suit to reduce an assessment to judgment. The IRS’s issuance of a notice of deficiency, making a demand for payment, or filing a Notice of Federal Tax Lien do not qualify for purposes of the 2-year statute of limitation. Relief under Section 6015(f) may be requested at any time during the IRS’s 10-year statute of limitations on collection. However, innocent spouse relief cannot be used to circumvent the statute of limitations to request a refund under Section 6511.
While there are multiple avenues to relief, all begin by completing and filing Form 8857 Request for Innocent Spouse Relief. Practitioners should draft a cover letter to accompany the form that fully sets forth the requesting spouse’s facts and circumstances and any legal authority supporting the taxpayer’s request for relief, as the examining agent rarely contacts a taxpayer or his or her representative for additional information before issuing the IRS’s preliminary determination. The preliminary determination comes in the form of a 30-day letter, which affords protest rights for an independent determination with IRS Appeals. If no resolution is reached with IRS Appeals, the taxpayer may petition the Tax Court for a judicial determination within 90 days of receipt of the IRS’s final determination letter.
As the requesting spouse is asking the IRS to collect only against a non-requesting spouse on a joint liability, the non-requesting spouse is afforded an opportunity to participate in the administrative proceedings. In that regard, the non-requesting spouse can either (1) bolster the requesting spouse’s claim, or (2) provide reasons why innocent spouse relief should be denied. If the requesting spouse petitions the Tax Court, the non-requesting spouse has the right to intervene in the case.
Innocent spouse relief is not restricted to cases where spouses are divorced or separated, and accordingly innocent spouse relief should be considered and analyzed in every collection matter. For example, assume a case where a joint liability is attributable to a taxpayer husband, while the taxpayer wife’s equity in a retirement account would make an Offer in Compromise unviable. If the wife qualifies for innocent spouse relief, the equity in the retirement account would be excluded from the Offer in Compromise calculation and, as a result, may make the Offer a viable collection alternative.
The attorneys at Andreozzi Bluestein have extensive experience in collection resolution, including requests for innocent spouse relief. If you or a client would like to explore whether innocent spouse is a viable option, please call us at any time for a no obligation consultation.
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