INTRODUCTION
TO SPOUSAL RELIEF
Although many
taxpayers enjoy substantial tax benefits from filing joint returns,
those benefits may be outweighed when a tax deficiency or unpaid balance
is asserted for a return. The general rule is that each spouse has joint
and several liability. The IRS might also offset a current year joint
refund to pay a separate obligation of one spouse. In community property
states (like California), married individuals face the duty
to pay taxes on ½ of a spouses income - even when they file a married
filing separate return.
The law is
complex, and the court cases are many dealing with the issue of spousal
relief. I will provide a history of the law and a number of cases
relevant to this topic, but the material is voluminous so be prepared
for a long read! I would certainly not recommend that any
taxpayer undertake the mission of seeking relief without being
represented by a tax professional who has had actual experience (and
success) in proposing relief for his or her client. I
have represented clients in a number of these cases over the period of
my tax practice and (so far) have had 100% success. But it is a
lot of work, and occasionally, an appeal has to be filed if the
preliminary determination is unfavorable for the client.
There are three separate
categories to Innocent Spouse relief. They are:
(a) Innocent
Spouse,
(b) Separation
of Liability, and
(c) Equitable
Relief.
The first two
are only appropriate for understatement of tax on a return. That
means that the tax liability as shown on the return was wrong.
Typically, this error is discovered during an audit of the return.
On the occasion
that there is underpayment of tax, only the Equitable Relief
category is possible. Understatement and underpayment may both exist
under Equitable Relief.
Please review the
2013 Chief Counsel Notice at the end of this page for important insight
into the IRS litigation of these cases. Over the past years, there
have been changes to the procedures. Depending upon the year of
the liability and the year of filing for relief, different rules may
apply.
Significant Change
in the Rules for
Innocent Spouse
Relief
The IRS announced
(2013) that it will
extend help to more
innocent spouses by
eliminating the
two-year time limit
that now applies to
certain relief
requests.
After a thorough
review:
-
The IRS will no
longer apply the
two-year limit
to new equitable
relief requests
or requests
currently being
considered by
the agency.
-
A
taxpayer, whose
equitable relief
request was
previously
denied solely
due to the
two-year limit,
may reapply
using IRS
Form 8857
Request for
Innocent Spouse
Relief, if the
collection
statute of
limitations for
the tax years
involved has not
expired.
-
The IRS will not
apply the
two-year limit
in any pending
litigation
involving
equitable
relief, and
where litigation
is final, the
agency will
suspend
collection
action under
certain
circumstances.
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IMPORTANT
ANNOUNCEMENT - JANUARY 8, 2012
IRS
Releases
New
Innocent
Spouse
Guidelines
IRS
yesterday
issued
Notice
2012-8,
which is
a
proposed
revenue
procedure
that
revises
the
threshold
requirements
for
requesting
equitable
relief
as well
as the
factors
used by
IRS in
evaluating
the
requests.
According
to IRS'
press
release,
the
factors
have
been
revised
to
ensure
that
requests
for
innocent
spouse
relief
are
granted
under
section
6015(f)
when
facts
and
circumstances
warrant
and
that,
when
appropriate,
requests
are
granted
in the
initial
stage of
the
administrative
process.
More
specifically,
the
notice
expands
how IRS
will
take
into
account
abuse
and
financial
control
by the
nonrequesting
spouse
in
determining
whether
equitable
relief
is
warranted.
The new
guidelines
are
effective
immediately
and will
remain
in place
until
the
finalized
Rev.
Proc. is
published.
IRS will
immediately
begin
using
the new
guidelines
when
evaluating
equitable
relief
requests
under
section
6015(f).
The link
to the
press
release
also
includes
the
notice
and the
ubiquitous
IRS
YouTube
video
and
podcast.
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The following was released by the California Board of Equalization
in October 2013 addressing changes in the Innocent Spouse Relief
procedures:
BOE Chairman Jerome E. Horton Announces Important Changes to
Innocent Spouse Relief
If your spouse owes income taxes, and you are an innocent spouse,
you can request relief from that tax liability.
Board of Equalization Chairman Jerome E. Horton has called for
state conformity with important changes to the Internal
Revenue Service’s (IRS) Revenue Procedure 2013-34
governing Innocent Spouse Relief. The Franchise Tax
Board (FTB) clarifies that in determining whether to grant a
request for innocent spouse relief, FTB will rely on this
new IRS procedure, which makes some important changes to the
evaluation of this type of claim. Notably, there will now be
a greater emphasis on the effect of abuse and financial
control in the weight of the factors.
Horton said, "Where federal and California laws are the same,
federal rulings dealing with the Internal Revenue Code (IRC)
are persuasive authority in interpreting California statutes.”
Generally, to qualify for Innocent Spouse relief, you must meet
all of these conditions:
-
You must have filed a joint return which has an
understatement of tax;
-
The understatement of tax must be due to erroneous items
of your spouse;
-
You must establish that at the time you signed the joint
return, you did not know, and had no reason to know,
that there was an understatement of tax;
-
Taking into account all of the facts and circumstances,
it would be unfair to hold you liable for the
understatement of tax; and
-
You must request relief within two years after the date
on which the IRS first began collection activity against
you after July 22, 1998.
If you are making a request for relief under the innocent spouse
rules, allow us to help you understand these new guidelines.
Please visit the IRS’s website at
www.irs.gov/pub/irs-pdf/p971.pdf. For more
information on the new regulations contact the FTB at
1-800-852-5711.
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Here is a link
to a great YouTube video on this topic by Dennis Brager - a
former IRS Counsel Attorney I worked with when I was in IRS Appeals.
You can access the video
here:
The Power Point slides for this video are available
here:
INNOCENT
SPOUSE RELIEF
The IRS Restructuring
Act of 1998 provided expanded spousal relief for taxpayers who have
filed joint returns. IRC § 6015 provides three types of relief
which depend upon whether the tax liability arose as a deficiency or as
a filed joint return with a balance and upon the current marital status
of the of the parties. For the first time parties may seek
equitable relief from joint and several liability on joint returns even
when the liability resulted from a return filed with a balance due. [IRS
Publication 971]
The IRS Restructuring
Act of 1998 generally makes innocent spouse relief easier to obtain.
The Act eliminates all of the understatement thresholds of prior IRC §
6013 and requires only that the understatement of tax be attributable to
an erroneous (and not just a grossly erroneous as in the past) item of
the other spouse. An individual will be relieved of
liability for tax (including interest, penalties and other amounts) for
a tax year to the extent the liability is attributable to an
understatement (understatement and tax deficiency are synonymous)
described below:
1. A joint
return was filed for the tax year [IRC §6015(b)(1)(A)];
2. There
is an understatement of tax on the return that is attributable to an
erroneous item by the other spouse [IRC §6015(b)(1)(B)];
3. A taxpayer
establishes that in signing the return he/she did not know and had no
reason to know of the understatement; [IRC §6015(b)(1)(C);
4. Taking into account
all of the facts and circumstances, it would be inequitable to hold the
taxpayer liable for the deficiency attributable to the understatement; [IRC
§6015(b)(1)(D)].
Important Note: Concerning #5 (2-year rule), a
2004 Court case determined that the IRS failed to modify its
standard notice(s) as required by the Act to alert taxpayers to
their rights under Section 6015. Accordingly, the IRS
modified their forms following the court decision, and is NOT
enforcing the 2-year rule until 1/1/2007 (per my discussion
with the Innocent Spouse Processing Center).
Consequently, this 2-year rule will not apply for any
innocent spouse claims filed through 12/31/2006. This is a
link to the court case.
More recently, the IRS announced (see the beginning of
this page) that it no longer is imposing the 2-year rule
regardless of when the request for relief is filed!
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Knowledge
If an individual who otherwise qualifies for innocent
spouse relief fails to establish that he/she did not know or have reason
to know of the understatement, but does establish that he/she did not
know or have reason to know the extent of the understatement, that
individual may be relieved of liability for tax, penalties and interest
to the extent that liability is attributable to the portion of the
understatement that he/she did not know or have reason to know. (Did
you follow that?)
Example: If the husband and wife file a joint return and the IRS
determines the deficiency for the year based on $15,000 of unreported
income attributable to the husband. Wife shows she did not know or
have reason to know of $5,000 of the under-reported income. If the
wife otherwise qualifies for any spouse relief, she will be relieved of
joint liability for the portion of the understatement attributable to
the $5,000 of omitted income. She will still remain liable for the
taxes due on the $10,000 of omitted income.
Election Of
Separate Liability
The Act also provides a
separate liability election for a taxpayer who,
at the time of the election, is no longer married to including widowed,
is legally separated from, or has been living apart for at least 12
months from the person with whom the taxpayer originally filed a joint
return. [§3201] [IRC §6015(a)] The electing spouse must show that he
or she did not know of the understatement by the other spouse.
The knowledge
requirement is lower than for spouses who remain together where the
electing spouse must show that she did not know or have reason to know
in order to receive relief. A taxpayer may elect to have the
liability for any deficiency limited to the portion of the deficiency
that is attributable to items allocable to the taxpayer. The
election is not available if the Secretary (IRS) demonstrates that assets were
transferred between individuals filing a joint return as part of a
fraudulent scheme of the individuals or if both individuals had actual
knowledge of the understatement of tax.
Important Note Regarding Refund of
Amounts Previously Paid: If you file for
Innocent Spouse relief under the Separate Liability provision, any
amounts previously paid (or levied) by the IRS on the liability to
be relieved will generally NOT be refunded. By
contrast, claim for relief under the "standard" Innocent Spouse
Relief provision (6015(b)) can result in a full refund of all
payments made against the liability to the extent the applying
spouse is relieved of its payment. |
MUST
be Divorced, Separated or Living Apart
An individual is
eligible to make the separate liability election only if at the time the
election is filed he/she is no longer married to including widowed, or
is legally separated from, the spouse from whom the joint return to
which the election relates was filed; or he/she was not a member of the
same household as the spouse with whom the joint return was filed at any
time during the twelve month period ending at the date the election is
filed [IRC §6015(c)(3)(A)(i)].
This provision allows
additional relief when the IRS proposes a deficiency against a
taxpayer who is no longer married or living with the person with whom
he/she filed the joint return. The proponent may have had
indication of a potential understatement but must have been without
actual knowledge. If the understatement was not attributable to
him/her, he/she may elect proportional liability. The provision
does not apply to returns which were jointly filed showing a liability
at the time of filing. It only applies to deficiencies as
described in IRC §6662(d)(2)(a).
Time Deadline
Expanded innocent spouse relief and the separate liability election must
be elected no later than two years after the date on which the Secretary
has begun collection activities with respect to the individual seeking
the relief. The Act provides that the Tax Court has jurisdiction
with respect to disputes about innocent spouse relief. However,
please refer to the discussion above regarding the suspension of this
2-year requirement until 1/1/2007.
Equitable Relief
The IRS Restructuring
Act further authorizes the Secretary to relieve an individual of
liability if relief is not available under the expanded innocent spouse
rules set forth above, if it would be inequitable to hold the individual
liable for any unpaid tax or any deficiency. The expanded innocent
spouse relief, separate liability election, and authority to provide
equitable relief apply to liabilities for tax arising after the date of
enactment, as well as any liability for tax arising on or before the
date of enactment that remains unpaid on the date of enactment. A
taxpayer who filed a joint balance due return may seek equitable relief.
IRS Notice 98-61
& Rev. Proc 2000-15
IRS Notice 98-61
1998-51 I.R.B. 13 and Rev. Proc 2000-15 provide interim guidance to
taxpayers seeking equitable relief under section 6015(f) in three areas.
-
First, Section 3.01
of the notice provides threshold conditions that must be satisfied
in order for an individual to be considered for relief under section
6015(f).
-
Second, Section
3.02 of the notice sets forth the circumstances in which relief
under section 6015(f) will ordinarily be granted in the situation
where an individual did not know, and had no reason to know, that
funds intended for the payment of tax were instead taken by the
spouse for the spouse's benefit.
-
Third, for all
other requests for relief under section 6015(f), and all requests
for relief under section 66(c), Section 3.03 of the notice provides
a partial list of factors to be considered in determining whether it
would be inequitable to hold an individual liable for a deficiency
or unpaid liability.
Eligibility to Be
Considered for Equitable Relief
All the following
threshold conditions must be satisfied before the Service will consider
a request for equitable relief under S 6015(f). In addition, with the
exception of conditions (1) and (2), all of the following threshold
conditions must be satisfied before the Service will consider a claim
for equitable relief under S 66(c). The threshold conditions are as
follows:
(1) The
requesting spouse filed a joint return for the taxable year for which
relief is sought;
(2)
Relief is not available to the requesting spouse under S 6015(b) or
6015(c);
(3) The
requesting spouse applies for relief no later than two years after the
date of the Service's first collection activity after July 22, 1998,
with respect to the requesting spouse;
(Again, this will not be in effect until 1/1/2007)
(4) Except as
provided in the next sentence, the liability remains unpaid. A
requesting spouse is eligible to be considered for relief in the form of
a refund of liabilities for: (a) amounts paid on or after July 22, 1998,
and on or before April 15, 1999; and (b) installment payments, made
after July 22, 1998, pursuant to an installment agreement entered into
with the Service and with respect to which an individual is not in
default, that are made after the claim for relief is requested;
(5) No assets
were transferred between the spouses filing the joint return as part of
a fraudulent scheme by such spouses;
(6) There were
no disqualified assets transferred to the requesting spouse by the
non-requesting spouse. If there were disqualified assets transferred to
the requesting spouse by the non-requesting spouse, relief will be
available only to the extent that the liability exceeds the value of
such disqualified assets. For this purpose, the term "disqualified
asset" has the meaning given such term by S 6015(c)(4)(B); and
(7) The
requesting spouse did not file the return with fraudulent intent.
A requesting
spouse satisfying all the applicable threshold conditions set forth
above may be relieved of all or part of the liability under S 6015(f) or
66(c), if, taking into account all the facts and circumstances, the
Service determines that it would be inequitable to hold the requesting
spouse liable for such liability.
Circumstances
under Which Equitable Relief Will Ordinarily Be Granted
In cases where a
liability reported on a joint return is unpaid, equitable relief under
§ 6015(f) will ordinarily be granted (subject to the limitations of
paragraph (2) below) in cases where all of the following elements are
satisfied:
(a) At the time relief
is requested, the requesting spouse is no longer married to, or is
legally separated from, the non-requesting spouse, or has not been a
member of the same household as the non-requesting spouse at any time
during the 12-month period ending on the date relief was requested;
(b) At the time
the return was signed, the requesting spouse had no knowledge or reason
to know that the tax would not be paid. The requesting spouse must
establish that it was reasonable for the requesting spouse to believe
that the non-requesting spouse would pay the reported liability. If a
requesting spouse would otherwise qualify for relief under this section,
except for the fact that the requesting spouse had no knowledge or
reason to know of only a portion of the unpaid liability, then the
requesting spouse may be granted relief only to the extent that the
liability is attributable to such portion; and
(c) The requesting
spouse will suffer economic hardship if relief is not granted. For
purposes of this section, the determination of whether a requesting
spouse will suffer economic hardship will be made by the Commissioner or
the Commissioner's delegate, and will be based on rules similar to those
provided in § 301.6343-1(b)(4) of the Regulations on Procedure and
Administration.
Limitations
2.110
Relief under this section is subject to the following limitations:
(a) If the
return is or has been adjusted to reflect an understatement of tax,
relief will be available only to the extent of the liability shown on
the return prior to any such adjustment; and
(b) Relief will
only be available to the extent that the unpaid liability is allocable
to the non-requesting spouse.
Factors for
Determining Whether to Grant Equitable Relief.
Rev. Proc 2000-15,
2000-5 I.R.B. 447, 2000 WL 42026 applies to married individuals filing
separate returns in community property states who request relief under
section 66(c), and individuals who meet the threshold conditions of the
notice but who do not qualify for relief under the notice.
Individuals may
qualify for relief from tax liability for a taxable year under section
6015(f) or 66(c) if, taking into account all the facts and
circumstances, it is inequitable to hold the individual liable for the
unpaid liability or deficiency. The following are partial lists of the
positive and negative factors that will be taken into account in
determining whether to grant equitable relief under section 6015(f) or
66(c). The list is not intended to be exhaustive.
(1) Factors
weighing in favor of relief:
The factors weighing in
favor of relief include, but are not limited to, the following:
(a) Marital status.
The requesting spouse is separated (whether legally
separated or living apart) or divorced from the non-requesting spouse.
(b) Economic hardship.
The requesting spouse would suffer economic hardship (within the
meaning of section 4.02(1)(c) of this revenue procedure) if relief from
the liability is not granted.
(c) Abuse. The
requesting spouse was abused by the non-requesting spouse, but such
abuse did not amount to duress.
(d) No knowledge or
reason to know. In the case of a liability that was properly reported
but not paid, the requesting spouse did not know and had no reason to
know that the liability would not be paid. In the case of a liability
that arose from a deficiency, the requesting spouse did not know and had
no reason to know of the items giving rise to the deficiency.
(e) Non-requesting
spouse's legal obligation. The non-requesting spouse has a legal
obligation pursuant to a divorce decree or agreement to pay the
outstanding liability. This will not be a factor weighing in favor of
relief if the requesting spouse knew or had reason to know, at the time
the divorce decree or agreement was entered into, that the
non-requesting spouse would not pay the liability.
(f) Attributable to
non-requesting spouse. The liability for which relief is sought is
solely attributable to the non-requesting spouse.
(2) Factors
weighing against relief:
The factors weighing against relief include, but are not
limited to, the following:
(a) Attributable to
the requesting spouse. The unpaid liability or item giving rise to the
deficiency is attributable to the requesting spouse.
(b) Knowledge, or
reason to know. A requesting spouse knew or had reason to know of the
item giving rise to a deficiency or that the reported liability would be
unpaid at the time the return was signed. This is an extremely strong
factor weighing against relief. Nonetheless, when the factors in favor
of equitable relief are unusually strong, it may be appropriate to grant
relief under S 6015(f) in limited situations where a requesting spouse
knew or had reason to know that the liability would not be paid, and in
very limited situations where the requesting spouse knew or had reason
to know of an item giving rise to a deficiency.
(c) Significant
benefit. The requesting spouse has significantly benefitted
(beyond normal support) from the unpaid liability or items giving rise
to the deficiency. See S 1.6013-5(b).
(d) Lack of economic
hardship. The requesting spouse will not experience economic hardship
(within the meaning of section 4.02(1)(c) of this revenue procedure) if
relief from the liability is not granted.
(e) Noncompliance with
federal income tax laws. The requesting spouse has not made a good faith
effort to comply with federal income tax laws in the tax years following
the tax year or years to which the request for relief relates.
(f) Requesting
spouse's legal obligation. The requesting spouse has a legal obligation
pursuant to a divorce decree or agreement to pay the liability.
Refunds
A credit or refund can
be obtained under the innocent spouse rules and, under certain
circumstances, under IRS's authority to grant equitable relief to a
spouse (amounts paid from 7-22-98 TO 4-15-99). However, the
separate liability election may not be used to create a refund or to
direct a refund to a particular spouse.
Tax Court Has
Jurisdiction to Review Denial of Equitable Innocent
Spouse Relief in "Stand-Alone" Petition
Fernandez v.
Commissioner, 114 T.C. No. 21; 2000 U.S. Tax Ct. LEXIS 27 (Tax Ct. May
10, 2000).
In a case in which the
taxpayer's application was made directly through section 6015, rather
than as part of a section 6213 deficiency proceeding, the Tax Court held
it had jurisdiction to review a denial of equitable innocent spouse
relief, assuming the taxpayer made an election under subsections (b)
and/or (c).
In March 1999, Diane
Fernandez submitted a request for relief from joint and several
liability for tax year 1988, pursuant to section 6015 (b), (c), and (f).
The Service denied the request on the ground that she had actual and
constructive knowledge of the capital gains and the tax underpayment.
Additionally, the determination letter advised that Fernandez received a
significant financial benefit when she received sales proceeds of more
than $19,000. After Fernandez filed a petition with the Tax Court, the
Service moved to dismiss. It argued the Tax Court had no jurisdiction to
review a denial of subsection (f) relief.
Relying on Butler v.
Commissioner, 114 T.C. No. 19; 2000 U.S. Tax Ct. LEXIS 25 (2000), the
Tax Court said it did. Initially, the court looked to the prefatory
language in 6015(e)(1)("in the case of an individual who elects to
have subsection (b) or (c) apply") and determined the language did
not confine the court's jurisdiction to review of subsection (b) or (c)
elections. Instead, it merely sets forth the procedural requirements
necessary to obtain Tax Court jurisdiction for all seeking innocent
spouse relief. The court concluded that "before an individual may
petition this Court for review of innocent spouse relief, including
relief under subsection (f), such individual must make an election under
subsections (b) and/or (c)." Statutory authority for its
jurisdiction over subsection (f) could be found in 6015(e)(1)(A) which
states: "the individual may petition the Tax Court (and the Tax
Court shall have jurisdiction) to determine the appropriate relief
available to the individual under this section." The court
interpreted "under this section" to include all subsections of
6015. As did Butler, the court held that the legislative history makes
it clear Congress did not intend to limit its review of 6015.
Previously in Butler,
the Tax Court had held that a taxpayer can seek review of a denial of
6015(f) relief in a section 6213 deficiency proceeding, if he or she
applies for relief under subsection (b) or (c). Fernandez is noteworthy
because of its stance concerning "stand-alone" requests for
relief.
Distinction Between
Should Have Known and Actually Knew Gives Rise to 6015(c) Relief.
Charlton v.
Commissioner, 114 T.C. No. 22; 2000 U.S. Tax Ct. LEXIS 29 (May 16,
2000).
A former husband was
entitled to section (f) equitable relief where he knew of his wife's
self-employment income, but did not actually know of the amount of the
omitted income.
In connection with a
1994 joint income tax return, the IRS determined a $15,000 deficiency
arising from denial of deductions related to rental cabins and
reallocation of self-employment income from a physician transcription
service which the wife, Sarah Hawthorne, operated. Hawthorne and
ex-husband, Fredie Charlton, who divorced in 1995, separately asserted
that they qualified for innocent spouse relief. The Tax Court
consolidated the petitions.
Citing Butler v.
Commissioner, 114 T.C. No. 19 (2000), the Tax Court rebuffed the
government's contention that it lacked jurisdiction to decide whether
Hawthorne was entitled to equitable relief pursuant to section 6015(f).
Because Hawthorne and the IRS suspended any activity relating to her
claim while Charlton's case is pending, the court indicated she could
file a motion to seek Tax Court review if her application is denied.
Meanwhile, the court would delay entry of decision.
With respect to
Charlton, the court held that he did not qualify for relief pursuant to
section 6015(b). Though Charlton asserted that he did not know and had
no reason to know of the $22,000 understatement of the transcription
service's income, the court observed that he had prepared the income tax
return based on summary information his wife provided to him, and that
he had "unfettered access" to the service's financial records
which were maintained in their home.
Nonelecting Spouse
Entitled to Challenge Grant of Innocent Spouse Relief to Former Wife
Corson v.
Commissioner, 114 T.C. No. 24; 2000 U.S. Tax Ct. LEXIS 30 (May 18,
2000).
The Tax Court allowed
one former spouse to challenge the other electing spouse's claim for
relief under section 6015 where both spouses were before the court in
the same deficiency case. Under present law, Tax Court jurisdiction to
review innocent spouse claims arise either as an affirmative defense in
a 6213(a) deficiency proceeding or as review of administrative
determination regarding relief (or failure to rule) in a "stand
alone" matter. Because Judith's claim was raised as an amendment to
the couple's petition for deficiency redetermination, the court
considered her claim within the framework of deficiency jurisdiction.
Nonelecting
Ex-Spouse May Intervene in Deficiency Case Where Other Spouse is
Claiming 6015 Relief
King v. Commissioner,
115 T.C. No. 8; 2000 U.S. Tax Ct. LEXIS 52 (Aug. 10, 2000).
The Tax Court held
nonelecting spouses are allowed to intervene in any proceeding in which
the other spouse is claiming section 6015 relief.
"Item Giving
Rise to Deficiency" in Omitted Income Case Disputed
Cheshire v.
Commissioner, 115 T.C. No. 16; 2000 U.S. Tax Ct. LEXIS 61 (Aug. 30,
2000).
In a split decision, the Tax Court held that in omitted income cases,
section 6015(c)(3)(C) does not require actual knowledge on the part of
the electing spouse as to whether the entry on the return is or is not
correct. Pointing to legislative history, three judges dissented.
6015(c)
Kathryn was also not entitled to section 6015(c) relief. Here, the
parties disputed whether she had actual knowledge, at the time the joint
return was signed, of "any item giving rise to the deficiency (or
portion thereof)." With respect to the knowledge component of the
analysis, the court held that "the statute mandates only a showing
that the electing spouse knew of the item on the return that gave rise
to the deficiency," but not that knowledge of the tax consequences
arising from the item or that the item reported on the return is
incorrect. Further, the knowledge standard is an "actual and clear
awareness (as opposed to reason to know)" of the item's existence.
To the extent that legislative history arguably suggests otherwise, the
court stressed that nowhere does the statutory language "explicitly
state or reasonably imply that relief is denied only where the electing
spouse has actual knowledge that the item giving rise to the deficiency
... is incorrectly reported on the return."
Turning to the meaning
of the word "item," the court held that "in omitted
income situations 'item' refers to the item of income that should have
been reported on the return." This definition is consistent with
that used in other sections of the Code. Additionally, the court was
troubled that acceptance of an ignorance of the tax consequences (aka
law) defense would lead to "potentially any spouse who is not a
certified public accountant or tax attorney would be allowed to escape
paying income tax."
6015(f)
The petitioner was entitled to section 6015(f) relief with respect to a
portion of the accuracy-related penalty. The court was satisfied that
she believed that the portion of retirement distribution proceeds used
to pay off the mortgage on the family residence would be nontaxable.
Further, she acted in good faith inasmuch as she trusted and relied upon
her husband when it came to the preparation of the tax returns, she
asked him about the potential tax ramifications, had no reason to doubt
the truthfulness of his statements, and in fact believed him. The court
concluded that "[under these circumstances, we do not believe
petitioner had an obligation to inquire further." Accordingly, she
was entitled to relief as to the omitted retirement distribution
proceeds, but not as to the omitted interest income.
Concurrences
There were two concurrences. Judge Chiechi concurred in the result only.
In his concurrence, Judge Thornton construed the majority opinion to
reject the Service's argument that actual knowledge of an
"item" means actual knowledge merely of the event or
transaction giving rise to the deficiency. Five of the majority judges
joined in this concurrence.
Dissents
There were two dissenting opinions. The first, authored by Judge Parr,
stressed that 6015 is a remedial statute intended to provide broader
relief than that provided by section 6013(e). Though agreeing that it
was not inequitable to hold the petitioner liable for the deficiency
pursuant to section (f), Judge Parr was troubled that the majority
construed both the term "understatement" in 6015(b) and the
word "item" in 6015(c) as synonymous with
"transaction."
In a lengthy dissent,
Judge Colvin (joined by Judges Marvel and Parr) protested that the
majority's construction of 6015(c)(3)(C) "squarely conflicts"
with the legislative history of 6015(c). Unlike the majority, he found
the phrase "item giving rise to a deficiency" to be ambiguous
because it could refer to a transaction or activity or to knowledge that
an entry on a tax return was incorrect. Because of the sweeping changes
to the innocent spouse provisions in 1998, Judge Colvin advocated
caution in applying interpretations of the prior law to section 6015(c).
Under his reading of legislative history (including four separate items
for support), "Congress intended 'actual knowledge' to be knowledge
that the return is incorrect." Consequently, the majority
disregarded this requirement inasmuch as it held with respect to section
(f) relief that the petitioner thought the reporting of the
distributions on her tax return was correct.
Finally, the dissent
disparages the majority's treatment of prior authority. First, reliance
on Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000)(unpub.), was
inappropriate inasmuch as that opinion does not discuss whether the
actual knowledge of any item giving rise to a deficiency refers to
incorrect reporting. Second, the majority's failure to reconcile
Charlton v. Commissioner (see above) with Cheshire will "inevitably
cause confusion because, both here and in Charlton, we found that the
putative innocent spouse knew of the activity which gave rise to the
deficiency." If the majority intends to promulgate a new standard
such that knowledge of an income-producing transaction does not cause a
putative innocent spouse to fail to qualify for the separate liability
election unless the putative innocent spouse knew the amount of income
involved, then it should so state.
Form 8857, Form
12510 &
Publication 971
A taxpayer seeking
innocent spouse relief should file Form 8857 and Form 12510 with the IRS. If the
taxpayer is the subject of an on-going audit you should raise the
innocent spouse issue as soon as possible with the examining officer.
Review IRS Publication 971 prior to raising an innocent spouse defense.
A representative must be aware of potential conflicts of interest which will arise when
they
represent both parties.
Notice to Putative
Guilty Spouse
When an
innocent spouse claim is filed for one taxpayer, the IRS will notify the other
spouse filing the joint return. They will send that spouse a letter and
ask if he/she will verify the statements of the taxpayer seeking
innocent spouse status.
The Tax Court
To get Tax Court
review of a deficiency, a taxpayer must file a petition with the Tax
Court at Washington, D.C., in response to a notice of deficiency (90-day
letter, from IRS, within 90 days (150 days if the notice is addressed to
a person outside the U.S.) after the notice is mailed (i.e.,
postmarked). For 90-day letters mailed after Dec. 31, '98, a petition is
treated as timely if it's filed with the Tax Court on or
before the last date specified by IRS in the 90-day letter for filing
it. ( IRC § 6213(a)) The Tax Court's jurisdiction generally is
limited to the review (without a jury) of deficiencies asserted by IRS
(and not paid when the 90-day letter is issued). It can order payment of
a refund if it determines the taxpayer overpaid. ( IRC §6512(b))
But it can't grant equitable relief. The Tax Court has jurisdiction to
order a refund of any amount collected while IRS was
prohibited from collecting a deficiency by levy or court
proceeding but only if a timely petition for a re-determination of the
deficiency has been filed and only with respect to the deficiency
at issue. ( IRC § 6213(a))
Notice and
Intervention
If the IRS denies an
innocent spouse claim he/she may file a Tax Court petition pursuant IRC
§§ 6320(c) and 6330(d), added by §3401 of the Internal Revenue
Service Restructuring and Reform Act of 1998, but the statutes provide
that upon judicial review of determinations made by IRS appeals, notice
must be given the putative “guilty spouse” as follows:
(a) Notice:
The Commissioner shall serve notice of the filing of the petition on the
other individual filing the joint return.
(b)
Intervention: If the other individual filing the joint return
desires to intervene, then such individual shall file a notice of
intervention with the Court not later than 60 days after service of the
notice by the Commissioner of the filing of the petition, unless the
Court directs otherwise, and attach to the notice of intervention a copy
of such notice of filing. All new matters of claim or defense in a
notice of intervention shall be deemed denied.”
INJURED SPOUSE
Injured Spouse--a
person filing a joint return with an overpayment of taxes which is
offset by the spouse's taxes, non-tax debt such as a student loan or
back child-support. A claim may be filed to protect the injured spouse's
share of the joint overpayment.
NOTE: At the end of
this page is an excerpt from the IRS addressing INJURED SPOUSE important
tips. Past-due Support
A taxpayer who:
(a) files a joint
return with a spouse who has a past-due tax obligation or support
obligation and
(b) has income,
prepaid credits from withholding, estimated tax payments, or refundable
credits such as the earned income credit, can recover his portion of a
joint overpayment applied against the past-due child support owed by the
other spouse.
Form 8379
The taxpayer uses Form
8379—not Form 1040X —to file this injured spouse claim. If the joint
return hasn't yet been filed, he should attach Form 8379 to the joint
return and write "Injured Spouse" in the upper left corner of
the return. If the joint return has already been filed, he should mail
Form 8379 by itself to the Internal Revenue Service Center where the
joint return was filed. If the non-debtor spouse takes appropriate
action and secures his or her proper share of a tax refund from which
the offset was made, IRS must request that the Treasury Department's
Financial Management Service (FMS) deduct that amount from amounts
payable to HHS or the state.
Offsets To Non-tax
Federal Agency Debts
If a taxpayer filing a
joint return with the debtor owing a past-due legally enforceable debt
to a federal agency takes appropriate action to secure his or her proper
share of a tax refund against which an offset was made, IRS must pay
that person his or her share of the refund and request that the Treasury
Department's Financial Management Service (FMS) deduct that amount from
amounts later payable to the creditor agency. FMS and the creditor
agency must adjust their debtor records accordingly. IRS must pay that
person his or her share of the refund. IRS must deduct the amount of the
payment from amounts that are derived from later reductions in refunds
and are payable to the appropriate trust fund.
Community Property
States
In a community
property state (Texas), IRS was entitled to offset half of the refund
due on a joint return against a debt owed by the husband to a federal
agency, even though all of the refund was related to the wife's personal
earnings, the husband's debt was incurred before the marriage, and then
applicable Texas law provided that a spouse's personal earnings were
under her "sole management, control..." and that community
property under one spouse's sole management, control, etc. wasn't
subject to any liabilities incurred by the other spouse before the
marriage. State law exemptions of this sort don't prevent the federal
offset.
Award Of Fees
A refund due the
taxpayer and her ex-husband (H) was applied to a past due child support
obligation of H. Taxpayer filed an Injured Spouse Claim (Form 8379)
requesting her portion of the refund. IRS denied taxpayer's request. The
taxpayer was awarded fees because IRS's actions, after the suit was
filed, were "substantially unjustified" because they
unnecessarily increased taxpayer's litigation costs by focusing on
issues of jurisdiction and venue rather than examining the merits of the
taxpayer's substantive position.
IRC § 66 - TREATMENT OF COMMUNITY INCOME
Community Property
and Community Income
Federal income tax law
recognizes the principle of community income in community property
states, under which community income is treated as going half to each
spouse even if one spouse earns all the community income and the couple
files separate returns. Under specified conditions, however, the Code
relieves a "separated," or "innocent" spouse from
the above 50-50 allocation rule by allocating all the community income
to the earner-spouse. IRS may also disallow the benefits of community
property laws to certain spouses.
The laws of the
taxpayer's state (or country) of domicile (generally referred to as
"local law," determine whether two individuals are married and
thus subject to a state's or country's community property laws. Local
law also determines whether a taxpayer has community property or
community income. However, while local law determines a person's
rights to income or property, federal tax law determines the tax on
those rights. Federal taxes are affected by community
property laws only if married taxpayers file separate returns while
living in a community property state.
California
Community Property
Income of married
taxpayers domiciled in California is generally taxed as community
income—i.e., one half to each spouse when filing separate returns.
However, income from separate property, income from property in
non-community property jurisdictions treated by California as separate
property, income that the spouses previously agreed would be treated as
income from separate property, and income after divorce or legal
separation is taxed as separate income from the spouse's separate
property.
A wife domiciled in
California has a vested interest in community property. For tax
purposes, community property income is divided equally between husband
and wife. This is true even if the community income is derived
from illegal sources (e.g., drug trafficking) by one spouse without the
knowledge of the other. Otherwise allowable deductions paid out of
community income are generally deductible one-half by each spouse.
Earnings Included
as Community Income.
Under then applicable
California law, there was a statutory presumption that a husband's
earnings were community property. Clear and satisfactory proof was
required to contradict this presumption. That proof included persuasive
evidence of the existence of an agreement between a husband and wife
changing the status of the earnings from community property to separate
property.
Tax Advantage
The tax advantage in
filing separate returns, where it exists, is seldom large. Many tax
cases on community status in recent years involve separate returns of
husband and wife living apart rather than united couples filing
separately for a tax benefit. In one case, married taxpayers who had
always filed joint returns tried unsuccessfully to take advantage of the
community property laws. The issue involved cancellation of debt (COD)
income that passed through from a partnership interest that was
community property. Taxpayers excluded most of the COD income under the
insolvency exception, Sec. 108, but maintained that the wife shouldn't
have to reduce her allocated portion of an NOL carryover by any of the
excluded income because COD income wasn't considered "income"
under local (TX) community property law. The Tax Court rejected the
argument, pointing out that federal law defines what is
"income" for federal tax purposes.
§ 66 Treatment of
Community Income
The IRS may disallow
the benefits of any community property law to any taxpayer with respect
to any income if the taxpayer acted as if solely entitled to the
income and failed to notify the taxpayer's spouse before the due date
(including extensions) for filing the return for the taxable year in
which the income was derived of the nature and amount of the income.
§ 66 Standards
A married individual
who doesn't file a joint return, and omits from his or her gross income
his or her share of community income (determined under the allocation
rules of IRC § 879(a), is relieved from income tax liability on the
omitted income if both of these two requirements are met:
(1) The individual
must establish lack of knowledge or reason to know of the omitted item,
(2) Under all the
facts and circumstances it would be inequitable to include the item of
community income in the individual's gross income. In this case, the
item will be included only in the other spouse's gross income (and not
in the gross income of the individual).
Benefit From Income
In determining whether
it would be inequitable to include the item in the gross income of the
spouse lacking knowledge, the determination may include whether that
spouse benefited from the untaxed income, and whether the defense was
promptly raised to prevent the statute of limitations from running on
the other spouse. Congress is concerned about the inequity of taxing an
individual on community earned income of the other spouse where the
individual received no benefit from the earnings.
Example Of Benefitting From Income
A taxpayer benefited
from the income that was paid to and/or earned by her spouse during the
years at issue where at least a portion of that income was used to pay
at least some of the couple's living expenses for those years. These
living expenses included expenses for groceries, gasoline, maintenance
of the trailer house where they lived, utilities, and meals at
restaurants, as well as expenses attributable to their respective
children, and taxpayer's parents, who lived with them at various periods
during the years at issue. Thus, the Tax Court, affirmed by the Ninth
Circuit, concluded it would not be inequitable for the taxpayer to
include one-half of that income in her gross income.
Proving Lack Of
Benefit
Where a California
housewife didn't benefit from her former husband's income beyond normal
support, the Tax Court determined that it would be inequitable to
include unreported community income in her gross income to the extent
that she lacked knowledge of her husband's income.
When she lived with
her former husband, she rented her dwellings, drove an old car, and had
no credit cards. She took nothing away from the marriage except an
older, used car. Moreover, 16 years passed between the time that she and
her former husband separated and the time that she received a notice of
deficiency from IRS about his earnings, of which she knew little or
nothing even at the earlier date.
Knowledge Of Amount
A taxpayer's knowledge
of an item of community income must be determined with reference to her
knowledge of the particular income-producing activity. The exact amount
of the item isn't determinative. Thus, a claim that the innocent spouse
didn't know the specific amount of the unreported community income was
irrelevant in meeting the above two requirements.
No Reason to Know
The "no reason to
know" prerequisite wasn't met where the taxpayer-wife actively
participated (as a bookkeeper) in her husband's businesses that
generated the unreported community income. The requirement also wasn't
satisfied where a music teacher knew and participated in her husband's
real estate activities. Her participation consisted of acting as a
nominee on her husband's behalf in various real estate transactions,
attending real estate closings, and signing various documents. The
couple's move from a moderate residence to a home costing more than
$300,000 should have made the wife aware of the improvement of their
living conditions and therefore the income from the community real
estate.
Lack of Knowledge
The lack of knowledge
requirement also wasn't met where the taxpayer-wife knew that the
husband was a full-time employee, or was engaged in
income-producing business activities. Thus, where a taxpayer/wife knew
about her husband's income from his steel business, the requirement
wasn't met.
Contrary to her
testimony that she believed that the business was having financial
difficulties, the wife knew that her husband, whose sole source of
income was his steel business, was able to make $2,000 a month child
support payments to her and mortgage payments on her property during the
entire year in issue.
Illegal Income
However, where the
taxpayer-wife believed that her husband was only in a legitimate
occupation but the husband's unreported community income was derived
from illegal activities (such as narcotic trafficking or embezzlement),
the Tax Court won't attribute knowledge of the illegal activity or a
portion of the income from the illegal activity to the taxpayer-wife
without evidence that either the marital community or the taxpayer-wife
benefited from the unreported community income. The same rule was
applied to relieve a taxpayer-wife from tax liability on unreported
interest income from secret certificate of deposits of her husband.
Income of Separated
Spouses Under Community Property Laws.
Separated couples
treat their income according to the statutes of their state, unless they
meet the conditions of spouses living apart all year, In some states,
income earned after separation continues to be community income before a
decree of divorce.
In other states, it's
separate income. Depending upon the state, a decree of separate
maintenance may not dissolve community interest. On the other hand, the
court in the state issuing the decree may terminate the marital
community and divide the property between the spouses.
Separation Agreement vs. Separation
A separation agreement
dividing the community property between the spouses and providing that
this property along with future accumulations and the earnings of each
spouse is to be separate property might, in some states, end the marital
community. In other states, the marital community will end when the
husband and wife permanently separate, even without a formal agreement
Even if a taxpayer cannot qualify under § 66, he/she might
qualify for innocent spouse protection.
Denial of Community
Property Law Benefits to Certain Spouses
If a spouse acts as if
he or she is solely entitled to the community income and fails to notify
the other spouse of the nature and amount of the income before the
return due date (including extensions), IRS may deny any benefit of
community property laws to such spouse. In other words, IRS may charge
the spouse with the tax on his or her entire income. The Tax Court
applied this rule to attribute to (and thus tax) a husband the entire
community investment income where the wife wasn't notified of her share
of such income and the husband treated the entire investment income as
his own.
However, the rule
didn't apply where taxpayer hand-delivered to his wife (from whom he was
separated) various tax documents, including his Forms W-2 and 1099,
before the due date of her return. And the Tax Court refused to permit
IRS to disallow the benefits of the (Arizona) community property laws to
a married taxpayer who didn't act as if she were solely entitled to her
wage income, and didn't fail to notify her husband of that income, and
where IRS was unable to offer any persuasive reason for disregarding
those community property laws. Thus, taxpayer, who didn't file a joint
return (but whose return as filed reflected "a fanciful approach to
her Federal income tax responsibilities," including a negative
number for wages) was taxed on only one-half of her actual wages, not
the entire wages that IRS asserted in its deficiency notice.
The Tax Court also
rejected IRS's attempt to disallow the benefits of Arizona community
property laws to another taxpayer who lived separate from his wife, but
who had provided substantial income for the benefit of the marital
community and had done so despite the fact that he wasn't under a court
order compelling him to. It didn't matter that the amounts he sent to
his wife had fluctuated; the fluctuations were due to the changing
employment situations of the taxpayer and his wife.
IRC § 66(b)
Only Available To IRS
IRC § 66(b)
(footnote 42) can be used only by IRS in order to disallow the benefits
of community property laws to a taxpayer under certain prescribed
conditions. By its plain language, it's not a relief provision that can
be used by a taxpayer to avoid his or her liability for tax on community
income paid to and/or earned by the taxpayer's spouse.
IRC §
66(b) doesn't afford an "innocent spouse" remedy; a taxpayer
can't rely on it to claim innocent spouse relief. Where a taxpayer
argued that because IRS had previously determined deficiencies and
assessed tax against her spouse with respect to income earned by and/or
paid to the spouse, IRC § 66(b) relieved her from including
any part of that income, the Ninth Circuit affirmed the Tax Court's
decision that her argument was misdirected.
Theft loss
deduction for appropriated spouse's community income share.
Where a
spouse—usually the wife—has no control over her husband's community
income and the husband appropriates his wife's share of the community
income, may the wife take a theft loss deduction for the share she never
received but nevertheless was required to report on her separate return?
The Tax Court and the Fifth Circuit say "yes" but the wife
must first prove that her share was stolen (i.e., that the husband was a
thief). This wasn't proven in a case arising under the then Louisiana
law where the husband was deemed "head and master" of the
marital partnership, and in a case arising under the then Texas
law.
Observation:
Because of the current
Code relief provisions: one for spouses living apart; the other for
"innocent spouses", the much harder-to-prove theft loss
deduction issue is little used. However, in appropriate cases it is
still available.
New Revenue Procedure
released in 2003!!!!!!
Revenue Procedure 2003-61 provides further
guidance for a taxpayer seeking equitable relief as an “innocent
spouse”. See:
innocent_spouse_revproc.pdf
2007 IRS Notice -
revised form
Revised Innocent Spouse Form Now Available
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IR-2007-125, July 5, 2007
WASHINGTON — The Internal Revenue Service today
announced a redesigned Form 8857, Request for Innocent
Spouse Relief, that will help reduce follow-up questions
and reduce the burden on taxpayers.
The form will ask more questions initially, but
collecting critical information early in the process
will mean faster processing of the request. Previously,
Form 12510, Questionnaire for the Requesting Spouse, was
separate from Form 8857. The redesign will combine and
streamline the two forms. The redesigned form will be
easier to understand and complete and will help educate
taxpayers about the process.
The new design will eliminate an estimated 30,000
follow-up letters annually. This will result in reduced
burden, quicker responses to taxpayers and less cost to
the government. The revisions were based on suggestions
from an IRS process improvement team led by the Office
of Taxpayer Burden Reduction.
When a taxpayer files a joint return, both spouses are
jointly and individually responsible for the tax.
Innocent Spouse relief provides an opportunity for a
spouse to be relieved from the joint debt under certain
circumstances. If a taxpayer believes that only his or
her spouse or former spouse should be responsible for
the tax, the taxpayer can request relief from the tax
liability.
Related Items:
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2004 Court Case
In a 2004 Tax Court case,
a taxpayer's spouse was permitted to offer evidence in his spouse's
claim for innocent spouse relief.
Spouse can intervene to
support other spouse's innocent spouse claim
Diana Van Arsdalen,
(2004) 123 TC No. 7
The Tax Court has held that neither Code Sec. 6015 , nor its own Rule
325, precludes a spouse who isn't seeking innocent spouse relief from
intervening in a proceeding before the Court for the purpose of
supporting his spouse's or former spouse's claim for innocent spouse
relief.
Code Sec. 6015 provides relief from joint liability under
certain circumstances for tax arising after July 22, '98, and for any
liability for tax arising on or before July 22, '98, but remaining
unpaid as of that date. Code Sec. 6015(f) confers discretion on IRS to
grant equitable relief for taxpayers who don't qualify for relief under
Code Sec. 6015(b) (regular relief) or Code Sec. 6015(c) (relief for
separated and divorced individuals). Numerous requirements must be met
to qualify for relief.
In this case, Diana Von Arsdalen filed joint Federal income tax returns with
her then husband, Stanley David Murray, for the tax years '92 to '96. On
Oct. 23, 2003, IRS issued to her a notice of determination denying her
claim for relief from joint and several liability for '92 to '96. This
notice denied her all three types of innocent spouse relief—regular,
separate and equitable. After that, on Jan. 21, 2004, Diana filed with
the Tax Court a petition for determination of relief from joint and
several liability on a joint return challenging IRS's notice of
determination dated Oct. 23, 2003.
On Mar. 8, 2004, IRS filed with the Tax Court a notice of filing
petition and right to intervene (the notice). The notice stated that IRS
had informed Mr. Murray of the filing of the petition and of his right
to intervene in the case for the sole purpose of challenging Diana's
entitlement to relief from joint and several liability.
One week later, Diana filed with the Tax Court a Motion to strike the
notice on the ground that IRS misinterpreted Tax Court Rule 325(b)
insofar as the notice stated that Mr. Murray would be permitted to
intervene in the case for the sole purpose of challenging her
entitlement to relief from joint and several liability.
Mr. Murray later informed the Tax Court that he wanted to intervene for
the sole purpose of offering evidence in support of Diana's right and
entitlement to equitable relief and wouldn't be offering any evidence to
challenge her right to equitable relief.
IRS opposed the motion to strike.
Tax Court allows intervention to support spouse. The Tax Court concluded
that justice requires that the spouse not seeking relief be permitted to
intervene in administrative and judicial proceedings under Code Sec.
6015 for the purpose of submitting any information, be it favorable or
antithetical, that is relevant to the determination whether the other
spouse is entitled to relief from joint and several liability. Thus, it
agreed to Diana's motion and to file Mr. Murray's notice of
intervention.
* * * * * * * * * * * *
Here is another excerpt
from a 2004 Innocent Spouse Case:
IRS didn't abuse
its discretion in denying attorney/nurse Code Sec. 6015(f) equitable
relief from joint liability: although taxpayer showed that asset
transfers from husband pursuant to prenuptial agreement weren't
“disqualified” or part of fraudulent or tax avoidance scheme, and
although she further refuted IRS's fraudulent filing argument, relief
denial was supported by other factors including her failure to prove
economic hardship; failure to show lack of knowledge or reason to know
of non-payment for 1 year's reported liability and of omitted income and
erroneous deductions giving rise to other years' understatements;
failure to show those items were attributable only to husband; and
failure to show lack of significant benefit. (Maureen Monsour v.
Commissioner, (2004) TC Memo 2004-190 , 2004 )
* * * * * * * * * * * * * * * *
Here is a 2008 case involving Section
6015(f) relief:
Innocent spouse relief granted
despite ex-husband's objection
Bishop,
TC Summary Opinion 2008-33
The Tax Court agreed with the IRS and, over
the objection of the taxpayer's ex-husband, held that the taxpayer was
entitled to equitable relief under Section 6015(f) from her husband's
tax underpayments.
The taxpayer married in 1982, and the
couple had two children. The husband was previously a revenue agent who
conducted income tax audits for the IRS. However, in 1995, he pled
guilty to the charge of bribing a public official and was sentenced to
28 months in prison. He was released from prison in 1997 and rejoined
his family. Thereafter, he began working as an auditor for a state
agency. The taxpayer was employed as a claims processor for a health
insurance company. The couple separated in 2003 and were divorced in
2004.
Before and after 2000, the taxpayer and her husband began to live beyond
their means, incurring substantial expenses and debts. The husband was
domineering; he controlled the couple's financial matters and prepared
their federal income tax returns. During the years at issue (2000-2002),
he decreased his tax withholding by increasing his exemptions and
advised the taxpayer to do the same. These actions resulted in
underpayments of tax for the years 2000-2002 and the failure to pay
unpaid tax liabilities after they were assessed.
The
taxpayer did not sign the joint federal income tax returns for 2000 and
2001, and her husband did not disclose or discuss the return's contents.
However, she gave her Forms W-2 to the husband for those years, and they
were attached to the returns. Not until late 2002 or early 2003 did the
taxpayer become aware that the husband had made no payments on the
unpaid taxes for 2000 and 2001 ($2,532 and $4,685, respectively).
The
taxpayer did sign the couple's joint federal tax return for 2002. The
total underpayment for that year was $6,105. The taxpayer subsequently
corrected her withholding and entered into an installment agreement with
the IRS to pay the balance of her tax due for 2003. At the time of the
trial, she was current in paying her federal income tax.
Some
time after the couple divorced, the taxpayer filed a request with the
IRS for relief from joint and several liability under Section 6015(f)
with respect to her unpaid federal income tax liability. Although the
IRS initially determined that the taxpayer was not entitled to relief,
on review, it changed its mind and concluded that she was entitled to
relief. The ex-husband, however, objected, asserting that the taxpayer
should pay her share of the taxes, which meant that the Tax Court had to
determine whether the taxpayer was entitled to relief under Section
6015(f) for the relevant years.
In renderings its opinion, the court pointed out that because the
taxpayer was seeking relief from underpayments of tax, rather than
understatements of tax, relief was not available to her under Sections
6015(b) and (c), and her only avenue for relief was Section 6015(f)'s
equitable relief. Under section 4.02(1) of Rev. Proc. 2003-61, 2003-2 CB
296, however, Section 6015(f) equitable relief will ordinarily be
granted if each of the following elements is satisfied:
(1) On the date of the request for relief, the requesting spouse is
no longer married to, or is legally separated from, the
nonrequesting spouse, or has not been a member of the same household
at any time during the 12-month period ending on the date of the
relief request.
(2) On the date the requesting spouse signed the joint return, he or
she had no knowledge or reason to know that the nonrequesting spouse
would not pay the income tax liability.
(3) The
requesting spouse will suffer economic hardship if the Service does
not grant relief.
The
court said that the taxpayer was divorced from the husband and would
suffer economic hardship if relief was not granted. Also, she may not
have been aware of the tax liabilities on the 2000 and 2001 returns
because she did not sign them or discuss them and did not actually know
that there were unpaid taxes until late 2002. The court, however,
believed that the taxpayer should have had reason to know that the tax
liabilities might exist because of the couple's mounting debts and
severe financial situation. The court pointed out that she knew there
were unpaid taxes for 2002 because she signed the return for that year
and confronted her husband about the unpaid taxes for all three years.
Additionally, the taxpayer knew about the tax liabilities when she
joined the husband as a party in a chapter 13 bankruptcy proceeding in
February 2003. Therefore, the court concluded that the taxpayer did not
satisfy the knowledge element of Rev. Proc. 2003-61, section 4.02, and
did not qualify for equitable relief under that section.
Luckily for the taxpayer, this did not end the inquiry. If a spouse
fails to qualify for relief under section 4.02 of Rev. Proc. 2003-61,
the IRS may still grant relief under section 4.03 of that Procedure.
Section 4.03 lists factors that the Service will take into account in
determining whether to grant equitable relief under Section 6015(f). No
single factor is determinative, all factors are to be considered and
weighed appropriately, and the list of factors is not exclusive.
(1) Marital status.
The taxpayer and her husband separated in 2003 and divorced in 2004.
(Factor weighed in favor of granting relief.)
(2) Economic hardship.
The taxpayer's monthly income barely covered her monthly expenses.
She was raising two children and had not received child support from
her husband since 2004. In addition, when the husband was in prison,
the taxpayer incurred considerable debt in order to support the
family, which she was paying off. Therefore, the taxpayer would
suffer economic hardship if relief was not granted. (Factor weighed
in favor of granting relief.)
(3) Knowledge or reason to know.
As mentioned above, the taxpayer had reason to know that her husband
was not going to pay the tax liabilities. (Factor weighed against
granting relief.)
(4) Nonrequesting spouse's legal
obligation. The divorce
decree did not contain a provision as to which spouse had a legal
obligation to pay the outstanding tax liabilities. (Factor was
neutral.)
(5) Significant benefit.
The taxpayer did not receive significant benefit beyond normal
support from the unpaid tax liabilities. (Factor was neutral.)
(6) Compliance with income tax laws.
Tax compliance is a factor considered only against granting relief.
The IRS did not contend that the taxpayer did not make a good faith
effort to comply with her federal income tax obligations in years
subsequent to 2002. (Factor did not apply.)
(7) Abuse.
While the taxpayer was not physically abused by the husband, she
suffered mental and emotional abuse at his hands. He yelled and
threatened her, he accessed her bank account to pay pornography
sites, and he had an affair, which led to the divorce. The taxpayer
also feared he would retaliate against their children. (Factor
weighed in favor of granting relief.)
The
court found three factors in favor of relief, one against, and the rest
neutral. Accordingly, it concluded that it would be inequitable to hold
the taxpayer liable for the underpayments of tax, and she was entitled
to relief under Section 6015(f).
**************************************************************************************
In a
2009 case, the Court changes its standard of review that may provide
more opportunity for spouses pursuing relief:
Tax Court now uses
de novo
standard to review denial of equitable innocent spouse relief
Porter (2009), 132 TC No. 11
A
divided Tax Court has held that a de novo standard of review now is the
appropriate review standard required in determining if a taxpayer-spouse
is entitled to Code Sec. 6015(f) equitable innocent spouse relief.
Applying this standard, the Court concluded that the taxpayer was
entitled to equitable relief.
Background. Each spouse is jointly and severally liable
for the tax, interest, and penalties (other than the civil fraud
penalty) arising from a joint return. Code Sec. 6015(f) allows relief to
a requesting spouse if, among other conditions, taking into account all
the facts and circumstances, it is inequitable to hold the individual
liable.
Suzanne L. Porter (also known as Suzanne L.
Holman) applied for relief from joint and several liability for
additional tax under Code Sec. 72(t), related to a distribution her
husband received from his individual retirement account (IRA). IRS
denied Porter's application for relief, and she petitioned the Tax Court
for a determination of whether she was entitled to Code Sec. 6015(f)
relief.
De novo standard of review. The Tax Court concluded that in determining
whether a taxpayer, such as Porter, was entitled to equitable relief
under Code Sec. 6015(f), the Court must apply a de novo standard of
review, rather than an abuse of discretion standard as it had previously
done. While the Court noted that it had always applied a de novo scope
and standard of review in determining whether relief was warranted under
Code Sec. 6015(b) (innocent spouse relief) or Code Sec. 6015(c)
(separate liability relief), it had not done so for Code Sec. 6015(f)
relief cases.
In
2006, Congress amended Code Sec. 6015(e)(1) in the Tax Relief and Health
Care Act of 2006 (P.L. 109-432) to confirm the Tax Court's jurisdiction
to determine the appropriate relief available under Code Sec. 6015(f).
Given Congress's direction that the Tax Court determine the appropriate
relief available under Code Sec. 6015(b), Code Sec. 6015(c), and Code
Sec. 6015(f), the Court now concluded that there was no longer any
reason to apply a different standard of review for Code Sec. 6015(f)
relief cases. Accordingly, in cases brought under Code Sec. 6015(f), the
Court now applies a de novo standard of review as well as a de novo
scope of review.
Equitable relief. Applying that standard, the Court concluded
that Porter was entitled to Code Sec. 6015(f) equitable relief. The
factors favoring relief outweighed the factor opposing relief—that
Porter had reason to know of her husband's IRA distribution.
Accordingly, the Court found that Porter had met her burden of proving
by the preponderance of the evidence that it would be inequitable to
hold her liable for the Code Sec. 72(t) additional tax on her husband's
IRA distribution.
The
Court found that the factors favoring relief were that she and her
husband were divorced, that she would suffer hardship if relief were not
granted, that she didn't receive a significant benefit beyond normal
support from the IRA distribution, and that she diligently complied with
income tax laws in later years. That she had reason to know of the
distribution because it appeared on the face of their return favored not
granting her relief.
Under
an abuse of discretion standard, the Court noted that it has upheld
IRS's denial of Code Sec. 6015(f) equitable relief where the taxpayer
knew or had reason to know of the item giving rise to the deficiency or
that the tax would not be paid. However, the Court was no longer
restricted to determining whether IRS's determination was an abuse of
discretion. Under a de novo standard of review, the Court took into
account all the facts and circumstances to determine whether it was
inequitable to hold the requesting spouse liable for the unpaid tax or
deficiency. The Court recognized that Porter had reason to know of the
IRA distribution because she signed the return and didn't inquire into
its contents. But, this factor was tempered by the fact that she
regularly inquired into her husband's finances during the preceding year
and he refused to answer or answered evasively.
Split court. In addition to the majority opinion, the
Tax Court decision included two concurring opinions and a strong
dissenting opinion in which six judges joined.
*************************************************************************************************
Here is a 2009 Tax Court case where the taxpayer
lost. An important factor considered by the Court was that the
taxpayer would not suffer economic hardship if held liable for the tax
on the unreported unemployment compensation income:
IRS's refusal to grant
taxpayer Code Sec. 6015(f) relief from joint liabilities arising from
her and ex-husband's failure to include his unemployment compensation in
gross income was upheld: relief denial was supported by facts that
taxpayer knew of unemployment compensation and that she didn't show
she'd suffer economic hardship if held liable. Claim that she only knew
of income's existence but not that it was supposed to be reported was
considered irrelevant. Also, facts that she didn't significantly benefit
from income omission and had stayed compliant with her later year tax
obligations didn't outweigh foregoing relief-negative factors.
(Stephanie R. Hardin v. Commissioner, (2009) TC Memo 2009-115 , 2009 TC
Memo ¶2009-115 )
*************
This is an excerpt from a
2011 Appellate Court decision concerning the 2-year period within which
relief must be requested:
Code Section 6015—Joint returns—innocent
spouse relief—equitable relief—limitations periods—validity of
regs—equitable tolling.
Reg. § 1.6015-5(b)(1) , applying 2-year deadline to Code Sec.
6015(f) innocent spouse relief claims, was upheld as valid by
4th Cir. and Tax Court decision to contrary, striking reg down
and granting request for Code Sec. 6015(f) relief that taxpayer
filed outside 2-year deadline, was reversed and remanded:
rejecting Court's reasoning that Congress unambiguously intended
for Code Sec. 6015(f) to not carry 2-year deadline, 4th
Cir. found that Code Sec. 6015(f) was sufficiently ambiguous to
leave room for agency interpretation and that such
interpretation, reflecting IRS determination that no deadline
would create uncertainty and that instead 2-year timeline should
apply, was reasonable. Accordingly, taxpayer's arguments that
reg unnecessarily and inappropriately narrowed relief that
Congress had intended to provide in Code Sec. 6015(f) were
rejected. However, she was entitled to be heard on her
alternative argument that even if reg were valid, she should
still be given time extension under Reg. § 301.9100-3 . Case was
remanded for consideration of that issue. (Jones v. Comm., CA 4,
107 AFTR 2d ¶2011-930 ) |
Here is an excerpt from a
2011 case where the husband was granted innocent spouse relief:
Code Section 6015—Joint returns—innocent spouse relief—knowledge
or reason to know.
Ex-husband/former investment broker was granted Code Sec.
6015(c) relief from joint liability that was attributable to
unreported distribution from ex-wife's retirement account:
although taxpayer may have had reason to know of distribution
due to his status as joint signatory on joint bank account into
which distribution was deposited, IRS failed to show that he
actual knowledge of same. Evidence showed that when taxpayer's
checks were presented for payment, account contained sufficient
funds to cover checks, even without distribution; and taxpayer
credibly testified that he was unaware of ex-wife's request for
and receipt of distribution. Although instant deposit was
significant one-time deposit, it represented less than 20%
increase over ex-wife's annual earnings for year at issue; and
although taxpayer had access to bank statements, occasionally
drew checks on account and admitted that he would open mail,
uncontested testimony showed that he didn't review mail and that
ex-wife handled finances and balanced account. (Timothy L.
Richard, et al. v. Commissioner, (2011) TC Memo 2011-144 , 2011
RIA TC Memo ¶2011-144 ) |
INJURED SPOUSE
RELIEF
Seven Facts about
Injured Spouse Relief
If you file a joint
return and all or part of your refund is applied against your
spouses’ past-due federal tax, state income tax, child or
spousal support or federal nontax debt, such as a student loan,
you may be entitled to injured spouse relief.
Here are seven facts
the IRS wants you to know about claiming injured spouse relief:
-
To be considered an
injured spouse, you must have made and reported tax
payments, such as federal income tax withheld from wages or
estimated tax payments, or claimed a refundable tax credit,
such as the earned income credit or additional child tax
credit on the joint return, and not be legally obligated to
pay the past-due amount.
-
If you live in a
community property state, special rules apply. For more
information about the factors used to determine whether you
are subject to community property laws, see IRS Publication
555, Community Property.
-
If you filed a
joint return and you're not responsible for the debt, but
you are entitled to a portion of the refund you may request
your portion of the refund by filing Form 8379, Injured
Spouse Allocation.
-
You may file form
8379 along with your original tax return or your may file it
by itself after you are notified of an offset.
-
You can file the
Form 8379 electronically. If you file a paper tax return you
can include Form 8379 with your return, write "INJURED
SPOUSE" at the top left corner of the Form 1040, 1040A, or
1040EZ. IRS will process your allocation request before an
offset occurs.
-
If you are filing
Form 8379 by itself, it must show both spouses' social
security numbers in the same order as they appeared on your
income tax return. You, the "injured" spouse, must sign the
form.
-
Do not use Form
8379 if you are claiming innocent spouse relief. Instead,
file Form 8857, Request for Innocent Spouse Relief. This
relief from a joint liability applies only in certain
limited circumstances. IRS Publication 971, Innocent Spouse
Relief, explains who may qualify, and how to request this
relief.
For more information
about the Injured Spouse and Innocent Spouse Relief, visit
www.IRS.gov.
|
Chief Counsel
Notice 2013-011
In
a Chief Counsel Notice (CCN), IRS has provided guidance to Chief Counsel
attorneys regarding the handling and litigation of innocent spouse
relief cases. The CCN reflects IRS's recent Action on Decision (AOD) on
the Tax Court's standard and scope of review in Code Sec. 6015(f) cases,
and also includes detailed instructions on how to handle innocent spouse
claims that make their way to the Court before IRS has issued its own
determination.
Where its conditions are met, Code Sec. 6015 provides relief from joint
and several liability on a joint return to certain innocent spouses,
including equitable relief under Code Sec. 6015(f) where other relief
provided by Code Sec. 6015 is not available. Code Sec. 6015(e)(1) gives
the Tax Court jurisdiction to “determine the relief available“ to one
who files a timely petition requesting equitable relief. IRS argued in
these cases that the scope of the Tax Court's review was limited to
determining whether IRS abused its discretion in denying equitable
relief, and should be confined to matters contained in the
administrative record.
The Tax
Court, in Porter, (2008) 130 TC 115, and Porter, (2009) 132 TC 203, and
more recently in Wilson, TC Memo 2010-134, rejected IRS's positions. The
Tax Court, and the Ninth Circuit in affirming
Wilson
(Wilson v. Com., (CA 9 1/15/2013) 111 AFTR 2d 2013-522), held that the
Tax Court's review is
de novo
regarding both the scope of its review (allowing the relief-seeking
spouse to introduce evidence beyond the administrative record) and the
standard of review (allowing the Court to determine the taxpayer's
relief regardless of IRS's determination of the matter). Thus, the Tax
Court shouldn't be limited to evidence developed in the administrative
record, but may look to other facts. Nor is the Tax Court's ability to
grant relief dependent on a finding that the IRS abused its discretion
in denying relief.
In Action On Decision (AOD) 2013-007,06/04/2013, IRS acquiesced in the
Wilson
case and will no longer argue that the Tax Court can grant relief only
where it finds IRS has abused its discretion based solely on evidence in
the administrative record. (See Weekly Alert ¶ 10 06/13/2013 for more
details)
In light of the AOD, IRS has provided new guidance on the standard and
scope of review that the Tax Court applies when reviewing Code Sec.
6015(f) requests for relief from joint and several liability, as well as
on litigating cases that involve claims for relief under Code Sec. 6015.
In all Code
Sec. 6015(f) cases, under the
Porter
decisions, the standard and scope of review is
de novo.
However, even though Chief Counsel attorneys are no longer required to
preserve the standard and scope of review issues for appeal, the CCN
nonetheless advises them to continue to work with petitioners to
stipulate to evidence in the administrative record that is relevant to
the Court's determination regarding Code Sec. 6015 relief.
The CCN
noted that, although the Tax Court makes the final determination
regarding entitlement to relief under Code Sec. 6015(b), Code Sec.
6015(c), or Code Sec. 6015(f), it is still appropriate for IRS to have
the first opportunity to make a determination. If IRS hasn't has made a
determination regarding a petitioner's entitlement to Code Sec. 6015
relief before the petitioner filed a petition, the trial attorney must
request a determination from the Cincinnati Centralized Innocent Spouse
Operations (CCISO) unit. This can occur if the taxpayer filed a request
for relief with IRS but received no determination within six months, or
if a taxpayer raises Code Sec. 6015 relief for the first time in a
petition from a Notice of Deficiency.
The trial
attorney should share CCISO's determination with petitioner. If CCISO
denied relief, the petitioner may request that Appeals consider the
denial, and the trial attorney should refer the case to Appeals under
normal procedures if there is sufficient time before the trial. If there
is not time, but the parties agree that Appeals' review would facilitate
settlement, they should jointly request a continuance. The trial
attorney should prepare to defend CCISO's denial of relief at trial but
may also settle or concede the case.
If the
nonrequesting spouse has not intervened or is not a joint petitioner,
the trial attorney should generally follow CCISO's determination that
the petitioner is entitled to relief and settle the case. In the rare
circumstance that the trial attorney and his or her manager believe that
CCISO's determination shouldn't be followed, the matter must be
coordinated with the appropriate branches of the Procedure and
Administration Division. If Appeals determines that the petitioner is
entitled to relief, the trial attorney should follow that determination
and settle the case.
If the
nonrequesting spouse is a joint petitioner or an intervener in the case,
IRS can't provide Code Sec. 6015 relief or settle with the requesting
spouse unless the nonrequesting spouse agrees and is a party to the
settlement. (Corson, (2000) 114 TC 354) However, if the nonrequesting
spouse is not a joint petitioner or an intervener, IRS may settle with
the requesting spouse. Thus, in cases in which the nonrequesting spouse
is a party, the trial attorney should only treat the determination by
CCISO or Appeals to grant relief as a recommendation unless the
nonrequesting spouse agrees that the petitioner is entitled to relief.
If the
nonrequesting spouse does not agree that the petitioner is entitled to
relief, the trial attorney should decide whether granting relief is
appropriate considering CCISO's or Appeals' determination, the evidence
in the administrative file, discoverable evidence, statements and
documents submitted by the nonrequesting spouse, and evidence that may
be adduced at trial. If the trial attorney agrees that the petitioner is
entitled to relief, the trial attorney should enter into a stipulation
of settled issues with the petitioner with the understanding that the
case will still need to proceed to trial on the innocent spouse issue.
If the trial attorney agrees with the nonrequesting spouse that the
petitioner is not entitled to relief, the trial attorney should prepare
to defend CCISO's denial of relief at trial.
RECENT TAX COURT CASES
Wife denied innocent spouse receive because (a) the husband was not
deceptive and (b) the wife failed to ask questions
Arobo, TC Memo 2016-66
Tax
Court has held that where a couple filed jointly, the husband had always
been the primary financial provider, and their lifestyle hadn't changed
from earlier years when the couple reported significant business income
on their returns, the wife did not qualify for innocent spouse relief
with respect to their returns that showed either losses from, or didn't
even report activity from, the husband's business. The principal reason
for this holding was that she failed to establish that she didn't have
reason to know there was an understatement on those returns.
Married taxpayers who elect to file a joint Federal income tax return
are jointly and severally liable for the tax reported or reportable on
the tax return. However, Internal Revenue Code Section 6015 discusses several circumstances when a spouse
may be granted relief from the liability.
(a) Code Sec. 6015(a)(1) provides that a spouse who has made a joint
return may elect to seek relief from joint and several liability under
Code Sec. 6015(b).
(b) Code Sec. 6015(b)(1) provides that a taxpayer will be relieved of
liability for an understatement of tax if:
(A) a joint return was made for the tax year in question;
(B) there is an understatement of tax attributable to erroneous
items of the non-requesting spouse;
(C) the requesting spouse "establishes that in signing the return he
or she did not know, and had no reason to know, that there was such
understatement";
(D) taking into account all the facts and circumstances, it would be
inequitable to hold the requesting spouse liable for the deficiency
attributable to the understatement; and
(E) the requesting spouse elects to invoke Code Sec. 6015(b) within
two years after the date IRS has begun collection actions with
respect to the requesting spouse.
(c) Code Sec. 6015(f) provides for equitable innocent spouse relief
under procedures prescribed by IRS if:
(1) taking into account all the facts and circumstances, it is
inequitable to hold the individual liable for any unpaid tax or any
deficiency and
(2) relief is not available to the requesting spouse under Code Sec.
6015(b) or Code Sec. 6015(c). The requesting spouse has the burden
of proving that he/she is entitled to relief. (Alt, (2002) 119 TC
306119 TC 306)
In 2013, the IRS issued Rev Proc 2013-34 that sets forth a 3-step
procedure to be followed in evaluating requests for this equitable
relief:
(1) section 4.01 lists seven threshold conditions which must be met;
(2) section 4.02 lists circumstances in which IRS will make
streamlined relief determinations; and
(3) section 4.03 sets forth nonexclusive factors that IRS will
consider in determining whether equitable relief should be granted
because it would be inequitable to hold a requesting spouse jointly
and severally liable. The section 4.03 factors include:
(a) marital status (i.e., do the spouses remain together?);
(b) economic hardship;
(c) knowledge or reason to know of the requesting spouse;
(d) legal obligation arising from a divorce decree or other
binding agreement;
(e) significant benefit gained by the requesting spouse;
(f) compliance with income tax laws; and
(g) mental or physical health at the time of filing the request
for relief. No single factor is determinative.
The
taxpayers filed joint returns for the years
2004 through 2007. Mr. Arobo was the family's primary
financial provider. Mrs. Arobo had a college degree and earned roughly
$20,000 per year during those years.
Mr. Arobo was the sole owner of a mortgage origination company during
the years involved. It ceased doing business in 2008. Mrs. Arobo was not
involved in the operation of the company.
Mrs. Arobo paid the household bills. Mr. Arobo regularly gave Mrs. Arobo
checks drawn on his individual account or on one of the company's
accounts to pay household expenses.
The taxpayers' Federal income tax returns for the tax years of 2004
through 2007 were all late-filed. Mr. Arobo was responsible for
the preparation and filing of the taxpayers' income tax returns. Mrs.
Arobo did not review the returns; rather, she "entrusted her husband
and just signed them." She testified that she learned that Mr. Arobo
had failed to file their 2004, 2005, 2006, and 2007 tax returns only
when they were contacted by IRS.
The 2004 and 2005 income tax returns each reported on the first page, on
line 12, a business loss; they also reported negative adjusted gross
income. The 2006 and 2007 income tax returns reported adjusted gross
income of $52,163 and $32,049, respectively; no business income or loss
was reported on, and no Schedule C, Profit or Loss From Business, was
attached to, either the 2006 return or the 2007 tax return.
The Arobos came to a settlement with IRS with respect to their unpaid
tax liabilities. Mr. Arobo testified that he had recently found
employment, which he anticipated would provide him with funds to pay the
taxpayers' outstanding income tax liabilities.
The Court
held that Mrs. Arobo didn't meet the requirements of either Code Sec.
6015(b)(1) or Code Sec. 6015(f) innocent spouse relief.
Code Sec.
6015(b)(1) relief.
IRS conceded that Mrs. Arobo satisfied the requirements of Code Sec.
6015(b)(1)(A), Code Sec. 6015(b)(1)(B) and Code Sec. 6015(b)(1)(E), but
argued that she did not meet the requirements of Code Sec. 6015(b)(1)(C)
(whether the requesting spouse established that she did not know, and
had no reason to know, there was an understatement in income tax). And,
the Court agreed.
The Court said that an individual has reason to know of an
understatement if a reasonably prudent taxpayer in her position at the
time she signed the return could be expected to know that the return
contained the understatement. Consequently, the requesting spouse has a
"duty of inquiry" with respect to the income tax return filed. The duty
of inquiry is subjective, focusing on the individual seeking relief.
Citing Hayman, (CA 2 1993) 71 AFTR 2d 93-176371 AFTR 2d 93-1763, the
Court said that the factors to be considered in making this
determination are: (1) the requesting spouse's level of education; (2)
the requesting spouse's involvement in the family's business and
financial affairs; (3) the presence of expenditures that appear lavish
or unusual when compared to the family's past levels of income, standard
of living, and spending patterns; and (4) the culpable spouse's
evasiveness and deceit concerning the couple's finances.
The returns for 2005, 2006, and 2007 were filed only after the 2004
return was under IRS examination. As a result, a reasonably prudent
person in the position of Mrs. Arobo should have been diligent,
vigilant, and circumspect, and therefore she should have carefully
reviewed the 2005, 2006, and 2007 tax returns for accuracy. Even a
cursory review of each year's tax return would have revealed that Mr.
Arobo's mortgage origination business had reported (on line 12 of the
first page of each return) substantial losses for 2004 and 2005 and that
no business income or loss was reported for 2006 and 2007.
Mrs. Arobo was responsible for paying the family's bills. Had she
reviewed the tax returns, she would have seen that the returns reported
no net business income for four years and yet the family's standard of
living had not diminished. There was no indication that Mr. Arobo was
deceitful or evasive with respect to the family's finances.
Code Sec.
6015(f) relief.
The Court then looked to the factors in Rev Proc 2013-34 and concluded
that they pointed to Mrs. Arobo not qualifying for equitable relief.
IRS conceded that Mrs. Arobo met the threshold requirements of Rev Proc
2013-34, Sec. 4.01, and Mrs. Arobo conceded that she did not qualify for
the streamlined procedures of section 4.02. So, the Court looked at the
nonexclusive factors of section 4.03.
The parties agreed that factors (a) marital status, (f) tax compliance,
and (g) mental/physical health were neutral and that the legal
obligation factor was inapplicable. Accordingly, the Court limited its
inquiry to factors (b) economic hardship; (c) knowledge or reason to
know; and (e) significant benefit.
Rev Proc 2013-34, Sec. 4.03(2)(b), provides that an economic hardship
"exists if satisfaction of the tax liability in whole or in part will
cause the requesting spouse to be unable to pay reasonable basic living
expenses." The revenue procedure provides that factor (b) weighs in
favor of relief where the requesting spouse would suffer economic
hardship if relief were denied and is neutral where the requesting
spouse would not suffer such hardship if relief were denied.
Mrs. Arobo stated on Form 8857 (Request for Innocent Spouse Relief) that
her monthly income in 2015 was $3,420 and that her monthly expenses were
$3,360; thus, her monthly expenses do not exceed her monthly income.
Moreover, Mr. Arobo testified that he expected to be able to pay the
taxpayers' liability. Consequently, Mrs. Arobo did not prove she would
suffer economic hardship if she was denied relief. The Court found
factor (b) to be neutral.
As to knowledge or reason to know, the Court said that the analysis is
essentially that same as that in Code Sec. 6015(b)(1)(C) (see above) and
concluded that this factor weighed against relief.
Rev Proc 2013-34 provides that the significant benefit factor will weigh
in favor of relief if the nonrequesting spouse significantly benefited
from the unpaid tax or understatement and the requesting spouse had
little or no benefit or the nonrequesting spouse enjoyed the benefit to
the requesting spouse's detriment.
The taxpayers testified that they used their income to maintain their
lifestyle. If Mr. Arobo's mortgage origination business had suffered the
losses reported or had no income, the taxpayers' standard of living
would have been significantly decreased. Thus, Mrs. Arobo, as well as
Mr. Arobo, received the benefit of paying no tax on hundreds of
thousands of dollars. So, this factor also weighed against granting her
relief.
________________________________________________________________________________________________________________________________________________________________________
No innocent spouse relief for wife who knew husband received Form
1099 income
Lessard, TC
Summary Opinion 2017-95
The
Tax Court has held that, where a married couple filed a joint return,
then later divorced, the wife was not entitled to innocent spouse relief
with respect to two sources of income earned by the husband for which
the wife was aware he had received 1099 forms. The typical
scenario is that
married
taxpayers who file a joint federal income tax return are jointly and
severally liable for the tax reported or reportable on the tax return.
(Code Sec. 6013(d)(3))
However, Code Sec. 6015 provides that a spouse who has made a joint
return may elect to seek relief from joint and several liability under
one of three relief provisions.
Code Sec. 6015(b)(1) provides that a taxpayer will be relieved of
liability for an understatement of tax if:
-
A joint return was made for the tax
year in question;
-
There is an understatement of tax
attributable to erroneous items of the nonrequesting spouse;
-
The requesting spouse "establishes
that in signing the return he or she did not know, and had no reason
to know, that there was such understatement";
-
Taking into account all the facts and
circumstances, it would be inequitable to hold the requesting spouse
liable for the deficiency attributable to the understatement; and
-
The requesting spouse elects to
invoke Code Sec. 6015(b) within two years after the date IRS has
begun collection actions with respect to the requesting spouse.
An election under Code Sec. 6015(c) treats former spouses that filed a
joint return as if they had filed separate returns, and each spouse's
liability is limited to that portion of the deficiency properly
allocable to that spouse. (Code Sec. 6015(c)(1), Code Sec. 6015(d)(3))
Such an allocation is not permitted, however, if IRS demonstrates that
the individual electing relief had actual knowledge, at the time the
return was signed, of any item giving rise to a deficiency (or portion
thereof) which is not allocable to that individual. (Code Sec.
6015(c)(3)(C))
Code Sec. 6015(f) provides for equitable innocent spouse relief under
procedures prescribed by IRS if:
-
Taking into account all the facts and
circumstances, it is inequitable to hold the individual liable for
any unpaid tax or any deficiency and
-
Relief is not available to the
requesting spouse under Code Sec. 6015(b) or Code Sec. 6015(c).
The requesting spouse has the burden of proving that he/she is entitled
to relief. (Alt, (2002) 119 TC 306)
Rev Proc 2013-34, 2013-43 IRB 399, sets forth the following for use in
evaluating requests for this equitable relief:
-
Section 4.01 lists seven threshold
conditions which must be met (e.g., joint return was filed for
relevant year and no assets were transferred between the spouses as
part of a fraudulent scheme by the spouses);
-
Section 4.03 sets forth the following
nonexclusive factors that IRS will consider in determining whether
equitable relief should be granted because it would be inequitable
to hold a requesting spouse jointly and severally liable:
-
Marital status (i.e., do the
spouses remain together?);
-
Economic hardship;
-
Knowledge or reason to know of
the requesting spouse;
-
Legal obligation arising from a
divorce decree or other binding agreement;
-
Significant benefit gained by the
requesting spouse;
-
Compliance with income tax laws;
and
-
Mental or physical health at the
time of filing the request for relief. No single factor is
determinative.
In this case, the requesting
taxpayer,
Mindy Lessard (Mindy), was married to Mr. Tomko in 2013. The couple
filed a joint 2013 tax return. They were divorced in 2014. The IRS
mailed a Notice of Deficiency (referred to as a 90-day letter)
to the taxpayers. According to the NOD, the tax arose due to their
failure to report the following two sources of income:
-
Cancellation of debt income in the
total amount of $19,741 and
-
$20,502 of withdrawals from Mr.
Tomko's retirement plan.
The cancellation of debt income was attributable to both taxpayers in
differing amounts. $14,936 of the cancellation of indebtedness
income was attributable to Mr. Tomko and the remaining $4,805 was
attributable to Mindy. Mindy said that she was not aware of the credit
card accounts until she received the Forms 1099-C, Cancellation of Debt,
at the end of 2013.
On Nov. 7, 2013, Mindy, at a bank and in the presence of a notary,
signed a spousal waiver permitting Mr. Tomko to withdraw money from his
retirement account at any time without her further consent. She was not
aware of any withdrawals, however, until after the receipt of Forms
1099-R at the beginning of 2014.
Mr. Tomko presented Mindy with their 2013 joint income tax return on the
night of Apr. 14, 2014, one day before the return was due. Mindy
generally looked it over and noted that it reflected a refund. She did
not specifically determine whether the retirement and cancellation of
indebtedness income was included on the return. Mindy signed the 2013
joint return, prepared by Mr. Tomko as she had no specialized tax
knowledge and she trusted him. Mr. Tomko had handled the tax returns and
financial matters in earlier years because of his banking and finance
background.
The Tax
Court held that Mindy did not qualify for relief under any of the relief
provisions for the following reasons.
The Court
held that Mindy did not qualify for Code Section 6015(b) relief as
she did not meet condition (D) or condition (E) as described in the
paragraph that begins "Code Sec. 6015(b)(1) provides that...", above.
As to whether Mindy knew or had reason to know of the understatement, by
her execution of a spousal waiver permitting Mr. Tomko to withdraw funds
from his retirement accounts in November of 2013, she was made aware of
his potentially withdrawing the funds. Subsequently, Mindy received and
was aware of the Forms 1099-R before the time the 2013 joint income tax
return was prepared and filed. Mindy admitted that she looked over the
return before filing although she relied on Mr. Tomko's expertise in
preparing it. Her signing the return without properly reviewing it does
not excuse her from "knowing or having reason to know" of the
misstatement on the return.
Whether it is inequitable to hold a spouse liable for a deficiency is
determined by "taking into account all the facts and circumstances".
(Code Sec. 6015(b)(1)(D)) The Court said that the most often cited
material factors to be considered are:
-
Whether there has been a significant
benefit to the spouse claiming relief and
-
Whether the failure to report the
correct tax liability on the joint return results from concealment,
overreaching, or any other wrongdoing on the part of the other
spouse.
The Court said that the record in this case did not reveal any
concealment, overreaching, or other wrongdoing on the part of Mr. Tomko.
Mindy and Mr. Tomko lived together throughout 2013 and did not become
divorced until June of 2014. Until that time, they shared household
expenses, and each contributed some income to pay those expenses. Mr.
Tomko used the withdrawals from his retirement account for usual living
expenses, and Mindy benefited from those expenditures. Thus, the Court
said, it was not inequitable to hold Mindy liable for the deficiency in
tax for the 2013 year.
The Court
held that this Code section 6015(c) didn't apply because Mindy
failed the knowledge requirement in Code Sec. 6015(c)(3)(C).
The Court said that the knowledge requirement of Code Sec. 6015(c)(3)(C)
does not require the electing spouse to know the tax consequences
arising from the item giving rise to the deficiency or that the item
reported on the return is incorrect. Rather, the statute mandates only a
showing that the electing spouse actually knew of the item on the return
that gave rise to the deficiency (or portion thereof).
When Mindy signed the 2013 joint return, she was aware of the amounts,
the sources, and the date of receipt of the retirement distributions,
and she was also aware of the cancellation of debt income attributable
to herself and Mr. Tomko. She became aware because of her receipt of the
Forms 1099-C and 1099-R. Although Mindy denied that she knew that Mr.
Tomko was going to withdraw retirement income at the time that she
signed the spousal waiver, she was aware of the Forms 1099-R reflecting
a total of $20,502 of retirement income withdrawn during 2013 when she
signed the 2013 joint return. Her failure to fully understand the tax
consequences of those items did not provide a basis for relief.
Mindy was
also not entitled to equitable relief under Code Sec. 6015(f).
One of the threshold conditions under Rev Proc 2013-34, Sec. 4.01 is
that the income tax liability from which the requesting spouse seeks
relief is attributable to an item of the nonrequesting spouse's income.
The Court found that Mindy's unreported $4,805 cancellation of debt
income precluded her meeting the seventh threshold condition and that
therefore the portion of the deficiency attributable to the $4,805
cancellation of debt income did not qualify for relief under Code Sec.
6015(f). It found that Mindy did meet the threshold conditions with
respect to the $14,936 of cancellation of debt income attributable to
Mr. Tomko and the $20,502 in withdrawals from Mr. Tomko's retirement
account.
The Court then did a detailed analysis of the Rev Proc 2013-34, Sec.
4.03 factors, with the following results:
-
Marital Status. Mindy was divorced
and living apart from Mr. Tomko when she filed her request for
"innocent spouse" relief. This factor weighed in favor of granting
relief.
-
Economic Hardship. In general,
economic hardship exists where payment of the tax liability would
cause the taxpayer to be unable to pay reasonable basic living
expenses. Mindy showed that there was outstanding debt at the time
of her divorce from Mr. Tomko, but there was no showing of economic
hardship. Accordingly, this factor did not weigh in favor of
granting relief.
-
Knowledge or Reason To Know. The fact
that Mindy did not understand the tax return and/or that the
disputed items of income (the retirement withdrawals and the
cancellation of debt income) were either misstated or not reported
on the return was of no import. As explained above regarding Code
Sec. 6015(b) relief, Mindy's signing of the return without properly
reviewing it did not excuse her from "knowing or having reason to
know" of the misstatement on the return. Consequently, this factor
did not weigh in favor of granting relief.
-
Nonrequesting Spouse's Legal
Obligation. Where a divorce decree or other court order gives the
nonrequesting spouse a legal obligation to pay the liability, this
fact can weigh in favor of granting relief to the requesting spouse.
No divorce decree or separation order imposed such a liability on
Mr. Tomko, and this factor therefore did not weigh in favor of
granting relief.
-
Significant Benefit. There was no
evidence that the proceeds of Mr. Tomko's canceled debt were
received or used in 2013, so as to that item, this factor was
neutral. As to the retirement withdrawals, they were made during the
period under consideration. Mindy and Mr. Tomko both financially
contributed to the payment of the household expenses during 2013 and
before their divorce in June 2014. There was, however, no indication
of a "significant benefit" (beyond normal support) from the unpaid
income tax liability or items giving rise to the liability.
Therefore, this factor weighed moderately in favor of relief.
-
Compliance With Federal Tax Laws. IRS
agreed that Mindy was in compliance with Federal income tax laws for
the tax years following the tax year to which the request for relief
related. Accordingly, this factor weighed in favor of relief.
-
Mental
or Physical Health. There was no evidence of mental or
physical health problems, and this factor was deemed neutral.
_______________________________________________________________________________________________________________________________________________________________________
Spouse who knew taxes weren't
paid still got equitable innocent spouse relief
Grady, TC Summary Opinion 2021-29
Code Sec. 6015 provides that a spouse who has made a joint return may
elect to seek relief from joint and several liability. Code Sec. 6015(f)
provides for equitable innocent spouse relief under procedures
prescribed by IRS if, taking into account "all the facts and
circumstances," it is inequitable to hold the individual liable for any
unpaid tax or any deficiency.
The Tax Court has held that, both for a tax year with respect to which a
wife didn't know her joint return taxes weren't being paid by her
husband, and for several years with respect to which she did know
her joint return taxes weren't being paid, the wife was entitled to
equitable innocent spouse relief.
The IRS's guidelines for determining whether to grant section 6015(f)
relief are found in Rev Proc 2013-34, 2013-43 IRB 397. If certain
threshold conditions are met, then the IRS will relieve the requesting
spouse of liability if either
-
Three additional conditions for
so-called “streamlined” relief are met, or
-
Relief is justified upon
consideration of multiple equitable factors.
The requesting spouse is eligible for streamlined relief under Rev Proc
2013-34, sec. 4.02, only in cases in which that spouse establishes that:
-
On the date the IRS makes its
determination, the requesting spouse is no longer married to, or is
legally separated from, the nonrequesting spouse;
-
The requesting spouse will suffer
economic hardship if relief is not granted; and
-
On the date the joint return was
filed, the requesting spouse did not know or have reason to know the
nonrequesting spouse would not or could not pay the underpayment.
The multiple factor test looks at, but is not limited to:
-
Marital status,
-
Economic hardship,
-
Knowledge or reason to know of
understatement or underpayment,
-
Legal obligations to pay the
tax,
-
Significant benefits reaped from the
understatement,
-
Subsequent compliance with income tax
laws, and
-
Mental or physical health.
A single factor is not determinative. (Rev Proc 2013-34, sec. 4.03(2))
In this case, Ms. Gans was married to Mr. Dickey for the years at issue,
2006-2011. Mr. Dickey took charge of filing and paying taxes due with
the couple's joint tax returns. However, for each of the years at issue,
he either filed late or didn't file at all. Mr. Dickey repeatedly told
Ms. Gans that he would file their tax returns and pay their tax debts,
and she should not worry about it. He set up multiple installment
agreements for the couple's Federal income tax liabilities. He made
intermittent payments between September 2008 and June 2015, but none
after that. Although Ms. Gans had access to the couple's joint bank
accounts, she did not check them to see whether Mr. Dickey made the
required installment agreement payments.
The couple divorced in 2015. Thereafter, Ms. Gans moved in with her
parents. Later, she married Mr. Gans.
Wife
qualified for streamlined relief for 2006.
In concluding that Ms. Gans qualified for streamlined relief in 2006,
the Court noted:
Ms. Gans was no longer married to Mr. Dickey when the IRS issued its
final determination.
Ms. Gans would suffer economic hardship if relief was not granted. A
requesting spouse will suffer economic hardship if payment of part or
all of the tax liability "will cause the requesting spouse to be unable
to pay reasonable basic living expenses." The determination as to what
constitutes a reasonable amount for basic living expenses may vary with
the circumstances of the individual taxpayer but will not include the
maintenance of an affluent or luxurious lifestyle. (Rev Proc 2013-34,
sec. 4.03(2)(b))
Ms. Gans testified that she was employed and had earned $14,190.52 in
2018 at the time of the trial. The Court has taken judicial notice that
the poverty level for one person in 2018 was $12,140. She did not own a
car or a house. Rather, she lived with her elderly and sick parents and
then her new husband, Mr. Gans, who owned the house she lived in and the
cars she used.
Ms. Gans did not have reason to know that Mr. Dickey would not pay the
2006 joint Federal income tax liability. When the couple filed their
2006 joint Federal tax return, Mr. Dickey requested an installment
agreement within 30 days after the return was filed that would apply to
the 2006 tax liability. Therefore, when Ms. Gans signed the 2006 joint
Federal income tax return, she did not know or have reason to know that
the underpayment would not be paid.
Wife
qualified under multiple equitable factor relief for the other years.
As to the other tax years in question, the Court held that each of the
factors weighed in favor of relief other than the
knew-or-had-reason-to-know factor. For example, the Court looked
to the same factors noted above in determining that the wife met the
economic hardship test. And the Court noted that the "significant
benefits" test weighed in her favor—she did not receive a significant
benefit from the failure to pay the outstanding tax liabilities.
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