Innocent or not: let the factors decide.

• Author: Recor, Mary

When a married couple elects to file jointly, they are agreeing to share and share alike: Each spouse is liable for the full tax due. If the IRS cannot collect the taxes from one spouse, it will attempt to collect 100% of the tax due from the other, not just 50%. (1) This also holds true for any interest and penalties that may have accrued.

Sometimes a couple who initially elected to use the married filing jointly status later has one spouse who wishes they had not. This spouse may not have any knowledge of what was reported on the tax return or why it was wrong but finds that he or she is responsible for 100% of the tax due under Sec. 6013(d)(3). However, the unhappy spouse may find relief in the innocent spouse provisions of Sec. 6015. This article focuses on the equitable relief available under Sec. 6015(f) and discusses a recent case that provides insight into how the courts apply the factors in real life.

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The Internal Revenue Service Restructuring and Reform Act of 1998 (2) enacted Sec. 6015, which provides relief in certain circumstances from joint and several liability. Sec. 6015(b) provides relief from understatement of tax for innocent spouses, and Sec. 6015(c) limits the innocent spouse's liability for tax when the spouses are no longer married. In the event that the taxpayer does not qualify for relief under these two subsections, Sec. 6015(f) may be helpful. Sec. 6015(f) authorizes the IRS to grant relief if, taking into account all the facts and circumstances, the IRS determines that it is inequitable to hold a requesting spouse liable for any unpaid taxes or any deficiency (or any portion of either).

Innocent Spouse Relief

These general conditions must be satisfied in order to seek relief from liability under Sec. 6015(b): (3)

(A) a joint return has been made for a taxable year;

(B) on that return there is an understatement of tax attributable to erroneous items of one individual filing the joint return;

(C) the other individual filing the joint return 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 is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and

(E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election.

Note that subparagraph (E) prescribes a two-year time limit for the requesting spouse to act. It also states that collection activities must have begun.

Taxpayers who are no longer married at the time they are making the request can seek relief under Sec. 6015(c). Under this subsection, the innocent spouse's liability will be limited to the portion of the deficiency that is allocable to that spouse under procedures spelled out in Sec. 6015(d). Conditions must be satisfied here as well:

(I) at the time such election is filed, such individual is no longer married to, or is legally separated from, the individual with whom such individual filed the joint return to which the election relates; or

(II) such individual was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed. (4)

In addition, the individual and his or her spouse must not have engaged in an asset transfer as part of a fraudulent scheme. (5) A fraudulent scheme includes a scheme to defraud the IRS or another third party, including, but not limited to, creditors, ex-spouses, and business partners. (6)

The individual can make the election after a deficiency for the year at issue is asserted but not later than two years after the date on which the IRS has begun collection activities with respect to the individual making the election. (7)

If the individual making the election had actual knowledge, at the time he or she signed the return, of any item giving rise to a deficiency (or portion thereof) that is allocable to his or her spouse under Sec. 6015(d), the individual will not be granted relief for that deficiency or portion of the deficiency. (8) However, this exception does not apply where the individual establishes that he or she signed the return under duress.

Note: If no collection activities have taken place, the taxpayer cannot make use of Secs. 6015(b) or (c) and must look to Sec. 6015(f) for relief.

Equitable Relief

When a taxpayer does not qualify for relief under Secs. 6015(b) or 6015(c), he or she can turn to Sec. 6015(f) for equitable relief. This section can provide help only when the taxpayer cannot obtain relief under Sec. 6015(b) or 6015(c).

There are a number of threshold conditions that must be satisfied for the IRS to consider any request for equitable relief. The IRS has given guidance in two revenue procedures for those taxpayers seeking relief under Sec. 6015(f). Exhibit 1 on p. 390 lists the conditions required by Rev. Proc. 2000-15. (9) This procedure has been superseded by Rev. Proc. 2003-61 (10) (Exhibit 2 on p. 391). The conditions under both revenue procedures are provided here for the purpose of comparison and, more importantly, because some of the litigation analyzed below took place while Rev. Proc. 2000-15 was in effect.

Exhibit 1: Rev. Proc, 2000-15 conditions

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 section 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;

(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...