Innocent Spouse Rules

• Jurisdiction: Maryland

XII. INNOCENT SPOUSE RULES

A. Introduction

One of the benefits of married couples filing a joint return is that the income tax brackets are lower than if they filed married filing separately, unless the income of each spouse is equal to the income of the other spouse. On the other hand, one of the detriments of a married couple filing a joint return is that they are subject to joint and several liability for any income tax reported on the joint returns; i.e., each spouse is responsible for payment of the entire tax (plus interest and penalty) reported on the joint return regardless of who earned the income. To protect a spouse whose only contribution, or at least major contribution, to the return was to sign it and thus expose herself/himself to tax liability, Congress enacted the innocent spouse rules which are designed to relieve an "innocent spouse from any liability reported on the return. This section discusses the innocent spouse rules and the requirements the spouse seeking innocent spouse treatment must meet to be relieved of joint and several liability.

B. Types of Relief

The IRS Restructuring and Reform Act of 1998 repealed prior I.R.C. § 6013(e) and added new I.R.C. § 6015. The purpose for the new provision was to make innocent spouse relief more accessible to taxpayers than had been the case under prior Section 6013(e).¹¹²⁵

The 1998 Act bifurcates innocent spouse treatment between two groups of taxpayers. I.R.C. § 6015(b) (Treas. Reg. § 1.6015-2) (sometimes referred to as "(b) relief") sets forth the procedures for relief from liability applicable to all joint filers. This provision allows a spouse to escape full or apportioned joint and several liability for an understatement of tax attributable to erroneous items of the nonrequesting spouse if the requesting spouse did not have actual or constructive knowledge of the understatement and it is inequitable to hold the requesting spouse liable for the tax. I.R.C. § 6015(c) (Treas. Reg. § 1.6015-3) (sometimes referred to as "(c) relief") sets forth the procedures for proportionate relief from joint and several liability for taxpayers who are divorced, separated, widowed or not living together for 12 months to allocate his or her tax deficiency between the spouses as if separate returns had been filed if the requesting spouse did not have actual or constructive knowledge of the understatement. This provision allows a spouse to request limited relief from a portion of the understatement or deficiency.

Section 66 provides relief for a spouse who did not file a joint return in a community property state and who did not include in gross income an item of community income that would be attributable solely to the nonrequesting spouse but for the operation of state community property law.

If relief is not available under I.R.C. § 6015(b) and (c), I.R.C. § 6015(f) (Treas. Reg. § 1.6015-4) (sometimes referred to as "(f) relief) authorizes the IRS to grant relief if it is inequitable to hold a taxpayer liable for any unpaid tax or deficiency.

The following chart summarizes the rules for innocent spouse relief:

Factors	Rules for Innocent Spouse Relief (b) Relief	Rules for Separation of Liability (c) Relief	Rules for Equitable Relief (f) Relief
Type of Return	The requesting spouse must have filed a joint return that has an understatement of tax due to an erroneous item of the nonrequesting spouse.	The requesting spouse must have filed a joint return that has an understatement of tax due, in part, to an item of the nonrequesting spouse.	The requesting spouse must have filed a return that has either an understatement or an underpayment of tax. The income tax liability from which the requesting spouse seeks relief is due to: (i) an item of the nonrequesting spouse with whom the requesting spouse filed the joint return, or (ii) an unpaid tax resulting from the non requesting spouse's income.
Marital Status	Married	The requesting spouse must be no longer be married, legally separated, or have not been a member of the nonrequesting spouse's household for an entire year before the requesting spouse files for relief.

Factors	Rules for Innocent Spouse Relief (b) Relief	Rules for Separation of Liability (c) Relief	Rules for Equitable Relief (f) Relief
Knowledge	The requesting spouse must establish that at the time he/she signed the joint return the requesting spouse did not know, and had no reason to know, that there was an understatement of tax.	If the IRS establishes that the requesting spouse actually knew of the item giving rise to the understatement, then the requesting spouse is not entitled to relief to the extent of the actual knowledge.	The requesting spouse must not have knowingly participated in the filing of a fraudulent return. The requesting spouse and the non-requesting spouse must not have transferred property to each other as part of a fraudulent scheme. The non-requesting spouse did not transfer property to the requesting spouse for the main purpose of avoiding tax or the payment of tax.
Other Qualifications			The requesting spouse does not qualify for innocent spouse relief or separation of liability.
Unfairness	It would be unfair to hold the requesting spouse liable for the understatement of tax taking into account all the facts and circumstances.		It must be unfair to hold the requesting spouse liable for the underpayment or understatement of tax taking into account all the facts and circumstances.
Refunds	The requesting spouse can generate a refund.	The requesting spouse cannot generate a refund.
Filing	File Form 8857 no later than two years after the initial IRS attempt to collect tax from the requesting spouse.	File Form 8857 no later than two years after the initial IRS attempt to collect tax from the requesting spouse.	File Form 8857 no later than two years after the initial IRS attempt to collect tax from the requesting spouse.

A requesting spouse may submit a single claim electing relief under both or either (b) or (c) relief, and requesting relief under (f) relief. However, equitable relief under I.R.C. § 6015(f) is available only to a requesting spouse who fails to qualify for (b) or (c) relief. If a requesting spouse elects the application of either (b) or (c) relief, the Service will consider whether relief is appropriate under either elective provision and, to the extent relief is unavailable under either (b) or (c), then whether it is available under (f). If a requesting spouse seeks (f) relief the IRS may not grant (b) or (c) relief in the absence of an affirmative election made by the requesting spouse under either of those sections. If in the course of reviewing a request for (f) relief only the IRS determines that the requesting spouse may qualify for relief under (b) relief or (c) relief instead of (f) relief, the Service is required to correspond with the requesting spouse to see if the requesting spouse would like to amend his or her request to elect the application of (b) relief or (c) relief. If the requesting spouse chooses to amend the claim for relief, the requesting spouse must submit an affirmative election under (b) relief or (c) relief. The amended claim for relief will relate back to the original claim for purposes of determining the timelines of the claims.¹¹²⁶

An executor of a decedent's estate may not only pursue a request for relief from joint and several liability under Section 6015 made during the decedent's lifetime, but also may file a request for (b), (c) or (f) relief from joint and several liability on behalf of the decedent.¹¹²⁷

Relief is not available for liabilities that are required to be reported on a joint Federal income tax return but are not income taxes imposed under Subtitle A of the Internal Revenue Code (e.g., domestic service employment taxes under Section 3510).¹¹²⁸

1. Definition of requesting spouse

A requesting spouse is an individual who files a joint return and elects (b) or (c) relief from Federal income tax liability, or requests (f) relief from Federal income tax liability.¹¹²⁹ On the other hand, a nonrequesting spouse is the individual with whom the requesting spouse filed the joint return for the year for which relief from liability is sought.¹¹³⁰

2. Procedure for relief from liability applicable to all joint filers I.R.C. § 6015(b) ("b relief")

a. Tests for (b) relief

Section 6015(b) provides for full or apportioned relief from joint and several liability if its tests are met to the extent such liability is attributable to an understatement of tax caused by the nonrequesting spouse. To qualify for complete innocent spouse treatment applicable to all joint filers, i.e., to qualify for (b) relief, five tests must be met:

First, a joint return must be filed for the taxable year in issue.¹¹³¹ See Raymond v. Commissioner,¹¹³² where the court held that to be eligible for relief under I.R.C. §§ 6015(b), (c), and (f), the taxpayer must file a joint return. In Raymond, the taxpayer filed "married filing separate."¹¹³³ The Court denied (b) and (c) relief because a joint return was not filed. Generally, to constitute a joint return the return must be filed by the spouses. Where the parties are divorced but nonetheless file a joint return, the requesting spouse is not eligible for innocent spouse relief because the parties did not file a valid joint return.¹¹³⁴ But if only one spouse signs the return based upon authorization of the other spouse, a joint return will be found to have been filed.¹¹³⁵ Where a husband files a joint return without objection of the wife, who fails to file a separate return, it may be presumed a joint return was filed with the tacit consent of the wife.¹¹³⁶ But where the parties are estranged, lived separate and apart, the wife earned no income and the husband, being unable to obtain the wife's signature on the return, signs the wife's name, a joint...