Innocent Spouse Relief from Joint and Several Federal Tax Liability: Updates, Hurdles, and Considerations.

• Author: Erdmann, Charlotte A.

Married couples can choose to file either joint tax returns or separate tax returns for federal income tax purposes. (1) In almost every situation, a married couple will have a lower tax liability if they choose to file jointly than if they choose to file their returns separately. (2) When a married couple chooses to file a married filing jointly return, each spouse becomes jointly and severally liable for the full amount of the tax liability, regardless of the source of income giving rise to the liability. (3) Joint and several liability is an important counterbalance to the financial advantages both spouses receive when filing as "married filing jointly." (4)

Joint and several liability can, however, provide for injustices in certain circumstances, which would leave a taxpayer to unjustly be liable for the tax liability alone. Innocent spouse relief is designed to provide relief from the joint and several tax liability that has been assessed against the spouse requesting relief. It reduces, and in some cases, completely removes the tax liability from the "innocent" spouse so that they can be free from IRS collection activities such as bank and wage levies, oppressive payment plans, tax refunds being seized, and a whole host of other tax issues.

Consider a spouse whose husband runs his own businesses. While she knows of one business, she does not know of a second business. That second business has its own bank account, and the husband pays himself in his own secret personal bank account from that second business. She raises their children and while she has a comfortable living situation, she does not live extravagantly. She signs the return that was prepared by their accountant and does not understand the return in its entirety or the items that are in it but can pick out the business income. Later, the couple gets audited, and it is discovered that the husband failed to report the income from the second business. Their marriage is ruined, and the couple gets divorced, and she struggles to reenter the workforce.

Or consider a married couple who maintain their own individual bank accounts but share a third, joint account, that they each deposit money into for shared living expenses. All income items are deposited into their own respective accounts. At tax time, they gather their tax forms and have an accountant prepare their return. From those items provided, they each know what the other earns. However, one spouse did not produce all the tax documents, and after the return is filed, the automated underreported unit for the IRS recognizes that the returns do not match the tax forms that the IRS has on file and assesses a deficiency against both taxpayers.

Finally, consider a woman who is emotionally, verbally, and financially abused by her husband. She lacks a higher education. She knows about her husband's business and the family finances, as well as his shady business dealings, but nonetheless signs the return given to her. After escaping her abusive husband, she is struggling to get on her own financial footing.

Innocent Spouse Relief--Avoiding the Consequences of a Joint Return

To alleviate some of these unjust situations, Congress enacted the Innocent Spouse Relief section as contained in I.R.C. [section]6015. Prior to 6015 and its predecessor statute, 6013(s), the Tax Court only had jurisdiction to hear a claim for innocent spouse relief when the claim was raised as an affirmative defense in a case brought under the court's jurisdiction in a deficiency proceeding. (5) Innocent spouse caselaw and legislation has greatly evolved, particularly in the last 25 years since the innocent spouse provisions in [section]6015 were enacted in 1998 as part of the Restructuring and Reform Act of 1998 (RRA 98).

The Restructuring and Reform Act of 1998 liberalized the availability of innocent spouse relief while providing new procedural requirements, including the ability for the nonrequesting spouse, to have procedural process. (6) Revenue Procedure 2013-34 replaced Rev. Proc. 2003-61, which expanded the impact of the presence of all forms of abuse on innocent spouse relief and attempted to liberalize the availability of innocent spouse relief overall. (7) Finally, the Taxpayer First Act of 2019 changed the judicial scope of review when the court reviews an IRS innocent spouse determination. (8)

The Timing of Requesting Innocent Spouse Relief

There are a few different procedural avenues for a taxpayer who wants to claim innocent spouse relief. A taxpayer can ask for innocent spouse relief at any time after the joint return was filed, depending on which provision relief is requested under. This can be done even during IRS audits/examinations or automated under-reporter proceedings. It can also be requested as part of a Tax Court deficiency case and brought as an affirmative defense. If the case is in IRS collections, innocent spouse relief can be filed at anytime, however, depending on the type of innocent spouse relief sought and when relief is requested, relief could be time barred, which is discussed below. Innocent spouse can also be requested as part of a "collection due process" or "equivalency" hearing with IRS appeals. (9)

The Three Relief Provisions Under I.R.C.[section]6015

Section 6015 provides for three avenues of relief from joint and several liability: 1) full or partial relief under 6015(b), which is the general relief provision applicable to all joint filers; 2) proportionate relied under 6015(c), whic requires the spouses be divorced or legally separated; and 3) equitable relief under 6015(f) if relief is not available under 6015(b) or 6015(c). (10)

* Section 6015(b) Relief (General Relief)--To be entitled to relief under [section]6015(b), a taxpayer requesting relief must satisfy five requirements: 1) a joint return was filed for the year(s) at issue; 2) the return(s) contain an understatement of tax attributable to an erroneous item of the nonrequesting spouse; 3) at the time of signing the return, the requesting spouse did not know and had no reason to know of the understatement; 4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liability for the deficiency attributable to the understatement; and 5) the requesting spouse's claim for relief is timely. (11) With 6015(b) claims, the biggest hurdle to relief is usually overcoming the knowledge requirement. The requesting spouse must be able to show that not only did they not know of the understatement on the return at the time the return was signed, but also, they had no reason to know of the understatement. (12) A taxpayer has knowledge or reason to know of the understatement if he or she actually knew of the understatement or if a reasonable person in similar circumstances would have known of the understatement. (14) Usually, the requesting spouse's lack of actual knowledge is not difficult to show, especially in circumstances involving a spouse who is not aware of the nonrequesting spouses' business operations or is not involved in the day-to-day affairs of a business.

The "reason to know" inquiry is more complex. A requesting spouse has a reason to know of an understatement if a reasonable person in similar circumstances could be expected to know there was an understatement or that further investigation was warranted. (14) In determining whether a requesting spouse had reason to know of an understatement, all the facts and circumstances are considered, including the requesting spouse's level of education, the requesting spouse's level of involvement in the family's business and financial affairs, the presence of unusual or lavish expenses compared to the family's past level of income and expenditures, and the nonrequesting spouse's level of evasiveness or deceit regarding the family's finances. (15) The extra layer of the "reason to know" inquiry exists because innocent spouse relief provisions are "designed to protect the innocent, not the intentionally ignorant." (16) The "reason to know" standard establishes a duty of inquiry on the requesting spouse, who, if he or she does not meet it, will be deemed to have constructive knowledge of the understatement. (17)...