Articles Posted in Innocent Spouse

What’s the Difference Between an Innocent Spouse and an Injured Spouse?
An innocent spouse defense is used to get relief from the typical joint and several liability that exists for joint tax returns. If you filed a joint return, and your spouse erroneously understated the amount of tax owed, you can attempt to claim innocent spouse relief. If you are successful, the IRS will not attempt to collect the understated tax from you.

An injured spouse is a spouse whose portion of a joint tax refund has been offset due to the other spouse’s financial obligations. An injured spouse can use form 8379 to attempt to reclaim their portion of a refund, but only if they are not responsible for the spouse’s financial obligation that caused the offset, and if the injured spouse either paid federal tax during the year or is due a refundable tax credit.

Why Tax Refunds Are Offset

Innocent Spouse Relief Options: Separation of Liability
Separation of liability is an innocent spouse defense that allocates a tax deficiency between two spouses in proportion to each spouse’s contribution to the deficiency. While the IRS can generally collect the entire tax debt for a joint return from either spouse, separation of liability—along with the other innocent spouse relief options—prevents the IRS from collecting tax from one spouse when the erroneous item on the return is attributable to the other spouse.

The Conditions for Separation of Liability Relief

In order to qualify for separation of liability, you must have filed a joint return and meet one of the following conditions:

The Requirements for Equitable Relief as an Innocent Spouse
Equitable relief is one of three forms of innocent spouse relief available to married, or formerly married, taxpayers. Taxpayers who filed joint returns are generally jointly and severally liable for the full amount of any tax due, but innocent spouse relief allows an escape from this liability. Unlike the other two forms of relief, equitable relief is available for amounts reported on a tax return but not paid, in addition to amounts attributable to items that were not reported on your tax return.

Generally, the following requirements must be met in order to qualify for equitable innocent spouse relief:

  1. You are not eligible for either of the other two types of innocent spouse relief.

How to Appeal a Denial of a Request for Innocent Spouse Relief
A request for innocent spouse relief is made by filing form 8857 within two years of the date that the IRS first attempted to collect the tax from you. You may have more time in certain situations, such as if you are seeking equitable relief.

The IRS must contact your spouse or former spouse to let them know that you have requested innocent spouse relief. This is true even in cases where spousal abuse or domestic violence occurred. The non-requesting spouse’s interests are affected by the IRS determination regarding your status as an innocent spouse because if you are successful, it will leave your spouse solely liable for some or all of the tax debt from your joint returns.

Because of the adversarial nature of innocent spouse determinations, your spouse or former spouse may try to show that you are not entitled to relief. They may claim that the item that caused the tax liability is partially attributable to you, or that you knew about an understatement of tax on the return. There are many factors that are weighed when making an innocent spouse determination, and you can expect the non-requesting spouse to point out all of the factors that weigh against a grant of innocent spouse relief.

Can the IRS Collect From a Non-Liable Spouse?
The IRS may be able to collect delinquent tax debt from a non-liable spouse in some cases. This means that tax debt that was accrued by one spouse on a return filed separately, may still result in collection action being taken on the other spouse. However, the IRS cannot pursue collection from a non-liable spouse in every case.

First, it is important to distinguish between joint tax debt and separate tax debt. Joint tax debt is any tax debt related to a return filed jointly. Separate tax debt could be related to a return filed before the taxpayer was married or a return filed after the marriage using the married filing separately status.

For joint tax debt, the IRS can collect from either or both spouses. They can levy your bank account, or your spouse’s bank account, or both. The Internal Revenue Manual states that wage levies should generally be applied to the spouse with higher earnings. However, in flagrant cases of neglect or refusal to pay, the IRS can levy the wages of both spouses.

Do I Qualify For Innocent Spouse Relief
There are three different types of innocent spouse relief. The IRS offers these defenses to taxpayers who want relief from the joint and several liability that is imposed on married taxpayers who file joint returns.

Traditional Innocent Spouse Relief

To qualify for traditional innocent spouse relief, you must meet all of the following conditions:

Can You Be Liable for Your Spouse’s Tax Debt
Married taxpayers often choose to file joint tax returns because of the higher standard deduction amounts, marginal tax rates thresholds, and other benefits. One aspect of joint filing that taxpayers are sometimes unaware of is that both taxpayers are jointly and severally liable for the taxes due, as well as any penalties or interest that are imposed by the IRS.

Joint and Several Liability for Tax Debt

Joint and several liability means that the IRS can go after either taxpayer (or both) for the full amount of the tax debt. Even if you later divorce, the IRS can go after you for tax debt from previous tax years when you filed a joint return.

Innocent Spouse
Many married couples find it advantageous to file a joint tax return rather than filing separately. This comes as no surprise as the federal government has built a number of tax advantages for married couples filing jointly into the tax code. These benefits include:

  • Depending income distribution, a lower rate of taxation than they would face filing separately.
  • Increased limits for charitable deductions

In IRS Notice IR 2012-3 the IRS announced that innocent spouse defenses pursuant to IRC Section 6015(f) will become a little easier. Generally there are three different kinds of innocent spouse defenses, each with its own rules and exceptions. IRS Notice 2012-8, which somewhat confusingly was announced in IRS Notice IR 2012-3, sets out a proposed new Revenue Procedure which will supersede Revenue Procedure (Rev. Proc.) 2003-61. IRS Notice 20012-8 addresses the criteria used in making innocent spouse relief determinations under the equitable relief criteria of Internal Revenue Code Section 6015(f). The IRS Notice covers several topics. It provides for certain streamlined determinations; it creates new guidance on the potential impact of economic hardship, and the weight to be accorded to certain facts in determining equitable innocent spouse relief. Importantly it also expands how the IRS takes into account abuse and financial control by the nonrequesting spouse in deciding whether to grant equitable relief.

The IRS is inviting comments on the forthcoming proposed Revenue Procedure. The comments must be submitted by February 21, 2012.

One important change is that under Rev. Procedure 2003-61, which previously provided guidelines for equitable innocent spouse determinations, lack of economic hardship was treated as a factor which weighed against granting equitable innocent spouse relief. Now if economic hardship exists that is still a factor which weighs in favor of granting innocent spouse relief. However, the lack of economic hardship will no longer be counted against a requesting spouse. Instead it will be treated as neutral.

Another significant change is that the proposed revenue procedure provides that abuse or lack of financial control may mitigate other factors that might weigh against granting equitable relief under IRC Section 6015(f). For example, even though a requesting innocent spouse has knowledge or reason to know of omitted income on a tax return if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information, and, therefore, because of the abuse or financial control the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse’s retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency.

In the end, however, the granting of innocent spouse relief is based upon all of the facts and circumstances. Only by discussing your case with a knowledgeable tax litigation attorney can you determine if you are likely to prevail.
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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.