Economic Hardship Results in Innocent Spouse Status

One of the factors that the Internal Revenue Service (IRS) takes into account in determining whether or not to grant innocent spouse relief, pursuant to the equitable innocent spouse provisions of Internal Revenue Code (IRC) 6015(f), is whether or not the requesting spouse will suffer economic hardship. Rev. Proc. 2003-61, 2003-2 C.B. 296. Economic hardship occurs where the innocent spouse would not be able to pay reasonable basic living expenses if the tax had to be paid.

While this rule is well established, in Williams v. Commissioner, T.C. Summ. Op. 2009-19, the Tax Court made a strong taxpayer friendly statement as to how the term economic hardship is to be interpreted. Mrs. Williams had received nearly $500,000 in her divorce settlement. Nevertheless, the Tax Court found that she would suffer economic hardship if the $25,000 tax payment were made. The Tax Court made its determination because the $500,000 was paid to Mrs. Williams’ parents to reimburse them for the amounts that they had lent to her to pay the legal fees incurred in the divorce. It was the IRS position that this money should have been used to pay the taxes, and therefore Mrs. Williams was not an innocent spouse . The Tax Court held that “Taxpayers are not required to choose among which debt to pay for determining economic hardship….”

This is a very important principle, and one which the IRS almost universally overlooks. This statement from the Tax Court could be useful in future cases; however, its value is limited because Williams is a “summary opinion,” and therefore is not legal precedent.

If you believe you may be an innocent spouse or have other IRS tax problems or Franchise Tax Board problems, contact the tax controversy lawyers at Brager Tax Law Group, A P.C.