Innocent-spouse defense against assessments on a joint return.

• Author: Ellentuck, Albert B.

MARRIED TAXPAYERS FILING A JOINT INCOME tax return have joint and several liability for the tax, and the IRS will look to both taxpayers for payment. However, Sec. 6015 provides two potential sources of relief to spouses and former spouses facing joint and several liability problems. Also, a third escape hatch for overall "equitable relief" is also provided if, considering all the facts and circumstances, it is inequitable to hold a taxpayer liable for any unpaid tax or deficiency. The innocent-spouse provisions apply only to taxes imposed by subtitle A of the Code, which generally includes income tax, the alternative minimum tax, self-employment taxes, and presumably the 3.8% net investment income tax, plus any related interest or penalties (Regs. Sec. 1.6015-1(a)(3)). Payroll taxes on household employees are not subject to the relief provisions.

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The rules are found in Sec. 6015. Sec. 6015(b) provides a general relief rule available to all joint filers, including those who are still married. This is commonly referred to as traditional relief. The second form of relief is provided by Sec. 6015(c), which is available to joint filers who, at the time an election is filed, are divorced or legally separated from the other parry to the joint return in question or have lived apart from the other party for the preceding 12 months. This is sometimes referred to as the separate liability election. To benefit from either provision, the taxpayer wanting relief (the electing individual) must make an election within two years of the commencement of IRS collection activity. The election is made by timely filing Form 8857, Request for Innocent Spouse Relief.

Traditional Relief for an Innocent Spouse

The general relief rule under Sec. 6015(b) is available to electing joint filers when there is a tax understatement attributable to erroneous items of the other party if the electing individual establishes that he or she did not know of the understatement and had no reason to know of the understatement. The general test of whether a spouse had actual knowledge or reason to know of the understatement is whether the spouse directly participated in the understatement or whether a reasonable person in the spouse's circumstances when the return was filed could be expected to know of the understatement (Shea, 780 F.2d 561 (6th Cir. 1986)). In addition, it must be shown that it would be inequitable to hold the electing individual responsible...