Innocent Spouse Relief (IRC §6015)

Eli S. Noff, Esq., CPA, Partner

Under Internal Revenue Code (IRC) §6013(d)(3), spouses who file joint income tax returns are subject to joint and several liability for the income tax reported on those returns. In other words, the IRS will hold each spouse responsible for the entire amount of tax due. Sometimes, however, one spouse may be innocent of actions taken by the other spouse resulting in an understatement on the tax return. In such cases, upon a qualifying administrative “innocent spouse relief” request, made pursuant to IRC §6015, the IRS may be persuaded to find that joint and several liability is inequitable.

Grounds for Relief (IRC §6015(b), (c), and (e))

When a spouse requests innocent spouse relief, the availability of such relief will depend on current marital status or current household composition. So long as the requesting spouse is no longer married to or living with the spouse with whom he/she filed jointly, then the requesting spouse may be entitled to full or partial relief based on three grounds:

  1. Lack of knowledge,
  2. Separate return determination, or
  3. Equitable relief

For a requesting spouse who is still married to or living with the other spouse, relief may still be sought on grounds of lack of knowledge or equitable relief; however, separate return determination is unavailable as a means to relief.

Lack of Knowledge (IRC §6015(b))

This first basis for relief must be elected by the requesting spouse within two years after the IRS begins collection activities. Relief may be granted if the requesting spouse can establish that: (1) he or she did not know, and lacked a reason to know, of an understatement on a joint return when the return was signed, and (2) facts and circumstances indicate that it would be inequitable to hold the requesting spouse liable for the understated tax.[1]If granted, to the extent attributable to lack of knowledge, the requesting spouse is relieved of liability for tax, penalties and interest.

The requesting spouse will be considered to have knowledge or reason to know of an understatement if: (1) he or she had actual knowledge of the understatement, or (2) a reasonable person in similar circumstances would have known of the understatement.[2]The IRS will consider the fact and circumstances involved to determine whether the requesting spouse had reason to know of an understatement. Relevant facts and circumstances include, but are not limited to:

  1. the nature of the erroneous item and the amount of the erroneous item relative to other items;
  2. the couple’s financial situation;
  3. the requesting spouse’s educational background and business experience;
  4. the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item;
  5. whether the requesting spouse failed to inquire, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question;
  6. and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (e.g., omitted income from an investment regularly reported on prior years’ returns); and
  7. the requesting spouse’s failure to challenge the other spouse’s understatement due to fear of retaliation arising from an abusive or controlling situation.[3]

The IRS also considers the facts and circumstances when determining whether the requesting spouse had actual knowledge of the understatement. For instance, the IRS will consider whether the requesting spouse deliberately attempted to avoid learning about the understatement in order to escape liability. Additionally, the IRS will factor in whether the requesting spouse and the other spouse jointly owned the property that resulted in the understatement.[4]

Separate Return Determination (IRC §6015(c))

For a requesting spouse who is no longer married to or has not been residing with the other spouse during the 12-month period ending on the filing date of the election for relief, a second basis for relief exists.[5]This relief, if granted, results in the requesting spouse’s liability being determined on a separate-return basis. In other words, the requesting spouse’s liability would be determined as is he or she had filed a separate return. Once again, the election for such relief must be elected by the requesting spouse within two years after the IRS begins collection activities. Also, the requesting spouse must not have had knowledge of the understatement at the time the return was signed.[6]IRS regulations provide the methods of allocating the deficiency to a spouse.[7]

Equitable Relief (IRC §6015(b))

If relief is unavailable under either “lack of knowledge” or “separate return determination,” the requesting spouse may find relief based on equitable grounds. Relief may be granted where the IRS determines that, given the facts and circumstances, it is inequitable to hold the requesting spouse liable for the understatement.

The initial threshold requirements and factors considered by the IRS in making this determination are located in administrative guidance issued by the IRS.[8]First, in order to be considered for this relief the requesting spouse must establish that:

  1. he or she filed jointly for the tax year for which relief is sought;
  2. neither lack of knowledge, nor separate return determination forms of relief are available;
  3. the claim for relief is timely filed
  4. no assets were transferred between the spouses as part of a fraudulent scheme;
  5. IRC §6015(c)(4)(B) “disqualified assets” were not transferred to the requesting spouse by the nonrequesting spouse;
  6. the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and
  7. the liability is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income.[9]

If these threshold requirements are met, then the IRS may make a streamlined determination granting equitable relief if the requesting spouse can show that:

  1. he or she is no longer married to the other spouse;
  2. economic hardship would result if relief is not granted; and
  3. he or she did not know or have reason to know: (a) that the joint return was filed with an understatement or deficiency, or (b) that the other spouse would not or could not pay the liability.[10]

However, if the threshold requirements are met, but the IRS does not make a streamlined determination, then the IRS will determine whether or not it is inequitable to hold the requesting spouse liable for a liability by considering the following factors:

  1. marital status
  2. economic hardship
  3. knowledge or reason to know of item resulting in the deficiency or that the liability would not be paid
  4. non-requesting spouse’s legal obligation to pay the liability pursuant to a divorce decree or similar agreement
  5. whether the requesting spouse received a significant benefit from the item resulting in deficiency or the unpaid liability
  6. compliance with tax laws
  7. the requesting spouse’s mental or physical health[11]

Judicial Review (IRC §6015(e))

Note that if the IRS denies administrative relief, a spouse may seek judicial relief from joint and several liability. A petition to the Tax Court for redetermination of joint and several liability must be filed no later than the 90thday after the mailing of the IRS’s notice of final determination.

If you are considering making a request for innocent spouse relief, please feel free to contact us at Frost Law today at 410-497-5974.

[1]IRC §6015(b)(1)(C), IRC §6015(b)(1)(D).

[2]Reg. §1.6015-2(c).

[3]Reg. §1.6015-2(c); Prop. Reg. §1.6015-2(b). Under Prop. Reg. §1.6015-2(b), three other factors are relevant: (1) any deceit or evasiveness of the nonrequesting spouse; the requesting spouse’s involvement in business or household financial matters; and (3) any lavish or unusual expenditures compared with past spending levels.

[4]Reg. §1.6015-3(c)(2)(iv).

[5]Legal separation will qualify as “no longer married.” IRC §6015(c).

[6]Note that if the requesting spouse had knowledge of the understatement, but signed under duress, then he or she may still pursue this relief. IRC §6015(c)(3)(C).

[7]Reg. §1.6015-3(d).

[8]Rev. Proc. 2013-34, 2013-43 I.R.B. 397.

[9]Id.

[10]Rev. Proc. 2013-34, §4.02; Notice 2012-8, §4.02.

[11]Rev. Proc. 2013-34, §4.02(2).

For reprint and licensing requests for this article, click here.

Tags: Articles, IRS, Tax Topics

RECENT Blog

RECENT Articles