Innocent Spouse Relief: Don’t Get Stuck With Your Spouse’s IRS Tax Debt
As one of the few tax attorneys in Lewis County, Washington, I spend a good portion of my day talking with clients and colleagues about relief from IRS collection activities. Although most people are aware of an Offer in Compromise, Currently Not Collectible status, or an installment agreement, Innocent Spouse relief is particularly effective for married, divorced, or separated persons. The scenarios below describe some common fact patterns I have encountered.
Scenario #1: You are married with children and you are currently living with your spouse. You are barely keeping your heads above the financial waters. Your spouse handles the family finances and they don’t discuss your family’s financial troubles. Each year you sign a joint tax return, but you really don’t know what it all means. A letter from the IRS was delivered stating you owe thousands of dollars in unpaid taxes. You have no idea how you or your family will be able to survive!!
Scenario #2: You are a divorced, separated, or widowed person, who filed joint tax returns while you were married. Your spouse failed to pay taxes or disclose income during marriage or even subsequent to the separation. Your spouse had always prepared the tax returns or had an accountant prepare the tax returns because you are terrible at math. One day, a letter from the IRS arrives in the mail stating you owe thousands of dollars. Now the IRS is coming to collect from you!
If you find yourself liable for the taxes of your spouse or former spouse, three avenues for obtaining Innocent Spouse relief pursuant to Internal Revenue Code Section 6015 may be available to you.
The first is Section 6015(b), which applies to the spouse in scenario #1. Section 6015(b) requires: 1) that a joint return was filed in the year of the liability; 2) there be an understatement of tax attributable to erroneous items of the spouse not requesting Innocent Spouse relief; 3) the requesting spouse did not know and had no reason to know of the understatement at the time the return was signed; 4) that holding the requesting spouse liable would be inequitable; and 5) the request for relief be made within 2 years from the date of the first collection activity.
The second avenue for innocent spouse relief is Section 6015(c), which applies to the spouse in scenario #2. Section 6015(c) requires the same five (5) elements as Section 6015(b), plus 6) the requesting spouse be either divorced, widowed, legally separated, or living apart from the nonrequesting spouse for the past 12 months; 7) no assets were transferred between the spouses filing the joint return as part of a fraudulent scheme by such spouses; 8) no disqualified assets were transferred between the spouses; and 9) the return was not filed with fraudulent intent.
The third avenue for innocent spouse relief is found in Section 6015(f). Section 6015(f) is often referred to as the catchall provision. To be eligible for relief pursuant to Section 6015(f), 1) a joint return was filed in the year of the liability; 2) no relief is available pursuant to Section 6015(b) or Section 6015(c); 3) the liability must be attributable to the spouse not requesting Innocent Spouse relief; 4) no assets were transferred between the spouses filing the joint return as part of a fraudulent scheme by such spouses; and 5) no disqualified assets were transferred between the spouses.
There are two very important differences between Sections 6015 (b) and 6015(c) and Section 6015(f). First, unlike Section 6015(b) and Section 6015(c) relief, Section 6015(f) can be used to relieve the requesting spouse of both deficiencies and underpayments. Second, although the Internal Revenue Service had argued that the request for relief pursuant to Section 6015(f) must be made within 2 years from the date of the first collection the IRS, on Monday, July 25, 2011, reversed course and does not require the 2-year rule.
In determining whether a spouse will be granted Innocent Spouse protection, the IRS and courts consider such factors as domestic violence, lifestyle of the requesting spouse, economic hardship, compliance with tax laws, and mental or physical health. Innocent Spouse relief is a heavily fact driven area of tax relief. Therefore, a detailed record of activities for the tax year a requesting spouse is seeking relief is essential.
The first determination that must be made in an innocent spouse case is whether joint and several liability actually exists. Joint and several liability means that both spouses are responsible for the same performance and both parties are equally liable for the taxes resulting from the deficiencies and underpayments. To be eligible for relief pursuant to Section 6015, a joint tax return, triggering joint and several liability, must have been filed. The key factor in determining joint liability is intent. If the parties did not intend to file a joint tax return, then there is no joint and several liability. The IRS and courts engage in an exhaustive inquiry into signatures, past filing history, duress, and other factors to determine the intent of the parties.
Once joint and several liability is determined and the requesting spouse meets the elements of either Section 6015(b), 6015(c), or 6015(f), the requesting spouse must follow the strict mechanics of the application process, as well as adhere to the timing requirements. A person believing they are eligible for Innocent Spouse relief must submit a Form 8857 within two years of the first collection activity. Information included in Form 8857 and any attachments should be carefully articulated. The proper terminology and posture could mean the difference between acceptance and denial of a claim.
If relief is denied by the IRS, the requesting spouse can seek Appeals Office and Tax Court review. Although the process may seem lengthy, a qualified spouse can be relieved of thousands or even tens of thousands of dollars in tax liability. If a spouse or former spouse is denied a request for Innocent Spouse relief, they may still be eligible for an Offer in Compromise, Currently Not Collectible status, or an installment agreement.
If you believe you are eligible for Innocent Spouse relief, I urge you to seek the advice of a tax professional. The Internal Revenue Code and the procedures for the Internal Revenue Service are very complex. Although this article provides highlights of the law, only a qualified tax professional reviewing your specific case can provide you with tax advice tailored to your specific needs.
This article is not intended or written to be used, and it may not be used, for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed in this article.