Innocent Spouse/Injured Spouse 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.

This section will address three methods to secure relief from spousal liability.  They are:

• Innocent spouse relief;
• Injured spouse relief &
• IRC  §66, for community property states.

IMPORTANT ANNOUNCEMENT - JANUARY 8, 2012

2.  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)]; and

5. A taxpayer elects the benefits of this provision, on the form that the IRS prescribes (Form 8857) , no later than the date that is two years after the date the IRS has begun collection activities with respect to the taxpayer. [IRC §6015(b)(1)(E)]

Knowledge

2.30   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 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.

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

2.60   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 "[u]nder 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

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.

Background. 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.

Facts. 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.

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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 )

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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.

Facts. 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.

Court's 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).

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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.

Facts. 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.

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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 )

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This is an excerpt from a 2011 Appellate Court decision concerning the 2-year period within which relief must be requested:

Here is an excerpt from a 2011 case where the husband was granted innocent spouse relief:

INJURED SPOUSE RELIEF