Innocent Spouse: Equitable Relief for Unpaid Tax Debts
Unpaid tax debts can be a contributing factor that leads to divorce. Innocent spouse relief can provide a remedy in this situation. This article addresses equitable relief. Equitable relief provides a remedy for unpaid tax liabilities that arise during the marriage.
About Equitable ReliefThe IRS is authorized to provide equitable relief from joint and several liability to a requesting spouse for an underpayment of tax.
What does this mean? It means that one spouse or ex-spouse who filed a joint tax return can ask the IRS to basically erase their name from the IRS*s collection roll. This means that the requesting spouse is still legally liable for the debt, but the IRS agrees not to collect the unpaid taxes from the requesting spouse.
When is Equitable Relief Granted?The general rule is that equitable relief is to be granted when it would be inequitable to hold the requesting spouse jointly and severally liable. This is a facts and circumstances analysis.
The requesting spouse has to meet several threshold requirements to qualify for equitable relief. Once these requirements are met, the law provides streamlined procedures to obtain relief. If the streamlined rules are not met, the requesting spouse may still qualify but must satisfy more rigorous tests.
The Threshold RequirementsThe law provides a list of seven threshold requirements that a requesting spouse must satisfy in order to be eligible to be considered for equitable relief. These factors are that:
1. The requesting spouse filed a joint return for the tax years for which relief is sought.
2. Relief is not available to the requesting spouse under the other two types of innocent spouse relief. These other two types of innocent spouse apply only in the case of an understatement of tax (i.e., an incorrect tax return) or a deficiency in tax (i.e., an IRS audit resulting in adjustments) and do not apply in the case of unpaid tax debts where the tax return was correct.
3. The requesting spouse is applying for relief timely.
4. The liabilities remain unpaid at the time the requesting spouse submits their request within two years from the date the IRS attempts to collect the tax.
5. No assets were transferred between the couple before or after marriage as part of a fraudulent scheme.
6. There are no disqualified assets transferred to the requesting spouse by the nonrequesting spouse.
7. The requesting spouse did not file the return with fraudulent intent.
If these requirements are met, one has to consider the streamlined relief rules.
Circumstances Warranting Streamlined ReliefThe law provides a list of circumstances under which the IRS generally grants streamlined relief for unpaid taxes. These circumstances includes:
1. The requesting spouse is no longer married to the nonrequesting spouse within twelve months of making the request.
2. The requesting spouse had no knowledge or reason to know that the tax would not be paid at the time the tax return was signed.
3. The requesting spouse will suffer economic hardship if relief is not
If these circumstances are met, the IRS can grant equitable relief without having to go further to consider the more detailed factors. If these circumstances are not met, the more detailed factors have to be considered.
The Absence of Streamlined ReliefIf the conditions of streamlined relief are not satisfied, the more detailed factors have to be considered. These factors include:
1. The requesting spouse is separated (whether legally separated or living apart) or divorced from the nonrequesting spouse.
2. The requesting spouse would suffer economic hardship if relief from the liability is not granted.
3. The requesting spouse was abused by the nonrequesting spouse, but such abuse did not amount to duress.
4. The requesting spouse did not know and had no reason to know that the liability would not be paid.
5. The nonrequesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the outstanding liability.
6. The liability for which relief is sought is solely attributable to the nonrequesting spouse.
7. The requesting spouse has made a good faith effort to comply with the income tax laws in the taxable years following the taxable year or years to which the request for relief relates.
8. The requesting spouse was in poor physical or mental health.
These factors are nonexclusive. No single factor is determinative. Even failing to satisfy the majority of the factors is not determinative. The IRS is to consider and weigh all of the factors.
Requesting Equitable ReliefThe IRS provides a form that can be submitted to request equitable relief.
Many taxpayers and their advisors are tempted to simply fill out the form, submit it, and see what happens. This approach will almost always result in a rejection.
The innocent spouse request should include a written statement and exhibits, which is not mentioned in the instructions for the IRS form.
The statement cannot be a canned response. It has to specifically address the taxpayers facts and circumstances. It should include a persuasive statement and supporting exhibits that rises to the level of a well written legal brief.
An experienced tax attorney should be engaged to help prepare the innocent spouse submission.