The continuing evolution of the "new" innocent spouse rules as implemented and interpreted by the Internal Revenue Service and the courts.

• Author: Sheehy, Frances D.
• Position: Part 2

This is the second part of a discussion of the continuing evolution of the innocent spouse rules, as interpreted by the IRS and the courts. Part I reviewed the old innocent spouse rules and [subsection] 6015(b) and (c)of the new rules. Part II will review the new equitable relief under [section] 6015 (f), the proposed regulations pending approval by the Department of Treasury, the Internal Revenue Service procedures, what to expect after submission of an innocent spouse claim, and whether the flexibility in application of the innocent spouse criteria which Congress envisioned has been attained.

Equitable Relief When All Else Fails--[section] 6015(f)

If an innocent spouse fails to qualify for relief under either [section] 6015(b) or [section] 6015(c), new [section] 6015(f) (1) gives the IRS discretion to grant relief to such individual if, taking into account all the facts and circumstances, it is inequitable to hold the innocent spouse liable for any unpaid tax or deficiency (or portion thereof) (2) Unlike innocent spouse relief or deficiency allocation under [subsection] 6015(b) and 6015(c), equitable relief under [section] 6015(f) can be granted for tax liabilities that are correctly reported on the return, but not paid, as well as for deficiencies. Innocent spouse relief and deficiency allocation under [subsection] 6015(b) and (c) apply only to understatements of tax.

The granting of equitable relief is completely within the Service's discretion. Revenue Procedure 2000-15 provides the criteria the Service will use to make its determination whether an electing spouse will be granted equitable relief. (3) The threshold requirements, according to Revenue Procedure 2000-15, for consideration for equitable relief under 6015(f) are: 1) a joint return was filed; 2) the request for relief was timely filed; 3) the taxpayer seeking relief does not qualify under [section] 6015(b) or [section] 6015(c); 4) assets were not transferred as part of a fraudulent scheme; 5) disqualified assets were not transferred; and 6) the joint return was not filed with fraudulent intent. Once the basic prerequisites are met, the IRS will consider all the facts and circumstances to determine whether the innocent spouse is entitled to relief. In deciding whether an electing spouse should be relieved of an understatement of tax, the IRS lists the following factors as weighing in favor of relief:

1) The electing spouse is separated or divorced from the nonelecting spouse;

2) The electing spouse would suffer economic hardship (inability to pay reasonable basic living expenses) if relief is not granted;

3) The electing spouse was abused by the nonelecting spouse, but such abuse did not amount to duress;

4) The electing spouse did not know and had no reason to know of the items giving rise to the deficiency;

5) The nonelecting spouse has a legal obligation pursuant to a divorce decree or an agreement to pay the outstanding liability; and

6) The liability for which relief is sought is attributable to the nonelecting spouse. (4)

Conversely, the presence of the following factors weigh against relieving an electing spouse from an understatement of tax:

1) The item giving rise to the deficiency is attributable to the electing spouse;

2) The electing spouse knew or had reason to know of the item giving rise to the deficiency; (5)

3) The electing spouse significantly benefitted from the item giving rise to the deficiency;

4) The electing spouse will not experience economic hardship if relief is not granted;

5) The electing spouse did not make a good faith effort to comply with the tax laws; and

6) The electing spouse has a legal obligation pursuant to a divorce decree or agreement to pay the liability. (6)

The Service's determination that an innocent spouse is not entitled to equitable relief is subject to review in the Tax Court under an abuse of discretion standard. (7) The Tax Court has determined that a taxpayer must ask for and be denied relief under [section] 6015(b) or [section] 6015(c) to obtain jurisdiction for review under [section] 6015(f). (8) The Tax Court has further determined that a request for and denial of relief under [section] 6015(f) is a prerequisite for review by the Tax Court. (9)

Once Tax Court jurisdiction is obtained, however, it may be difficult to overturn the IRS' denial of equitable relief from an understatement of tax because many of the same factors set forth in Revenue Procedure 2000-15 appear to be the same factors which would disqualify a taxpayer for relief under [subsection] 6015(b) and (c). For example, since one of the factors weighing heavily against equitable relief is whether the electing spouse knew or should have known of the understatement, an innocent spouse who cannot qualify for relief under [section] 6015(b) because he or she should have known of the understatement will, in all but the most egregious cases, probably be denied relief under 6015(f) as well. (10)

Similarly, one of the primary factors in making a...