Suppose that wife does not work in 2010, or that she works but has enough income tax withheld and remitted to taxing authorities to cover income tax on here income. Husband, on the other hand, has $400,000 of self-employment income in 2010. Having paid no estimated taxes, husband now owes $160,000 in Federal and State taxes on his income. Wife is not liable for tax on husband’s income. However, husband sees accountant, who prepares joint Federal and State income tax returns for husband and wife. The joint tax returns are signed and filed. The filing of the joint income tax returns is an irrevocable election  by wife to be jointly and severally liable  for the tax properly reportable on the returns. As a result wife is now fully liable for Federal and State income tax on husband’s 2010 income.
If the tax goes unpaid, the IRS and the State tax authority will issue notices of tax lien against husband and wife. These will impair the credit of each of them, disable each of them from selling or mortgaging real estate, and even affect the ability of each of them to secure new employment. In addition, the IRS and the State tax authority may levy each spouse’s wages and bank accounts unless the spouse enters into an installment agreement satisfactory to the IRS or the State tax authority, as the case may be.
What could wife have done to avoid this predicament? She should not have filed a joint income tax return with husband for 2010. If she had gross income in 2010, she should have fined 2010 Federal and State income tax returns as marries filing separate.
What can wife do now that she is in this predicament? As soon as possible she should retain competent tax counsel and apply to the IRS for innocent spouse relief. Internal Revenue Code Section 6015 provides relief from liability on a joint tax return under certain circumstances. Section 6015(b) relieves a spouse (“requesting spouse") from liability on a joint tax return where (1) there is an understatement of tax on the return attributable to one of the spouses, (2) the requesting spouse proves that in signing the return, she did not know, and she had no reason to know, that there was such understatement of tax, (3) taking into account all the facts and circumstances, it would be inequitable to hold the requesting spouse liable for such understatement of tax, and (4) the requesting spouse elects (in such form as the IRS requires) Section 6015 relief not later than two years after the IRS begins collection action against the requesting spouse with respect to the tax understatement.
Internal Revenue Code Section 6015(f) provides that where a requesting spouse does not qualify for relief under Section 6015(b), the IRS may nonetheless relieve her of liability for the tax deficiency on the joint tax return where it is inequitable to hold her liable for the tax. Revenue Procedure 2003-61  provides that in determining whether it is inequitable to hold a spouse liable for tax under Section 6015(f), the IRS considers (1) whether the spouses are separated or divorced; (2) whether holding the innocent spouse liable for the tax would impose an economic hardship upon her; (3) whether in signing the return the requesting spouse knew or had reason to know of the understatement of tax on the return (where the return understates the tax) or of the underpayment of tax (where the tax return correctly reports the amount of tax but the return is filed without payment of that tax); (4) whether a divorce decree or agreement imposes an obligation on the non-requesting spouse to pay the tax; (5) whether the requesting spouse benefited (beyond normal support) from the income giving rise to the tax deficiency; and (6) whether the requesting spouse has made a good faith effort to comply with tax laws since the year(s) in controversy. Two more factors weigh in the requesting spouse’s favor if present but do not weigh against her if not present: (1) whether the non-requesting spouse abused the requesting spouse; and (2) whether the requesting spouse was in poor physical or mental health at the time she signed the tax return in question or at the time she requested relief from such return.
A spouse requests relief under Internal Revenue Code Sections 6015(b) and (f) by completing Form 8857, Innocent Spouse Relief, and filing it with the IRS. The IRS routinely denies requests for innocent spouse relief. Where relief is denied, the requesting spouse should promptly file an appeal with the IRS Appeals Office. The requesting spouse should not spend a great deal of time on the appeal, however, as the IRS Appeals Office routinely denies such appeals. Upon denial of an appeal, the requesting spouse can petition the U.S. Tax Court. If she is unsatisfied with the result in the Tax Court, she may appeal to the U.S. Court of Appeals. The requesting spouse’s chances for relief are greatest in the U.S. Tax Court and the U.S. Court of Appeals.
Wife can also retain malpractice counsel and prosecute a claim for malpractice against the accountant who prepared the joint income tax returns.
I have handled many innocent spouse cases. I have tried two innocent spouse cases—one has been briefed and is awaiting decision by the Tax Court, and the other has not yet been briefed.
This is the first of three articles I plan on joint tax returns and innocent spouse relief. The next article will address technical points for attorneys in handling such cases. The final article will address policy issues of whether we should have joint tax returns, and whether Rev. Proc. 2003-61 appropriately interprets the requirements for equitable relief under Internal Revenue Code Section 6015(f).
This article simultaneously posted on my Forbes.com blog, http://blogs.forbes.com/stephendunn/.
 IRC § 6013(f)(4).
 IRC § 6013(d)(3); Treas. Reg. § 1.6013-4(b).
 2003-2 C.B. 296.
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