Knowledge of Items Giving Rise to Understatement Precludes "Innocent Spouse" Relief.

• Author: Fiore, Nicholas J.

K and C were married. In 1992, C took early retirement. As a result, C received a distribution, a portion of which was rolled over into a qualified account and the rest of which was put into a joint account at the AT Credit Union. K was aware of C'S receipt of the retirement distributions and the amount thereof, as well as the interest earned on the AT account.

K and C made several large disbursements from the AT account in 1992, paying off the mortgage on the family residence and purchasing a car. They also used the retirement distributions to pay family expenses and provide startup capital for a new business for C and for investments. In addition, K and C used the retirement distributions to satisfy loans taken out to acquire a family truck and for a car for one of their children, as well as to open a college bank account for their daughter.

In 1995, K and C divorced. Pursuant to a divorce decree, C transferred to K his interest in the family residence and title to the car. At the time of transfer, the family residence and the car were unencumbered.

C prepared and filed his and K's joint income tax returns, including their 1992 return. Before signing the return, K questioned her husband about the potential tax ramifications of the retirement distributions. C falsely told her he had consulted with a CPA (M), and had been advised that proceeds used to pay off the mortgage on their home would reduce the taxable amount of the retirement distributions. Accepting her husband's answer, K did not inquire further and signed the 1992 return. K assumed that the 1992 return would be timely filed. On the 1992 return, C and K reported that they had received a retirement distribution of approximately $200,000 and that $56,150 of that amount constituted taxable income. In addition, they reported $477 in interest income, as well as a $12,349 loss on Schedule C.

In August 1994, K received a letter from the IRS stating that it had not received their 1992 return. In searching for a copy of the 1992 return, K discovered in a desk drawer the original 1992 return, as well as a check for the amount of tax shown as owed. K immediately contacted M, who advised her to file the 1992 return and enclose payment for the tax liability reflected on the return as soon as possible. K filed the 1992 return along with the remittance on Aug. 15, 1994. In October 1994, K received notification from the Service that $8,502 in estimated tax payments claimed on their 1992 return...