Vol. 11, No. 1, Pg. 20. Tax Liability of Innocent Spouses After the IRS Reform Act.

• Author: By Tracey Green

South Carolina Lawyer

1999.

Vol. 11, No. 1, Pg. 20.

Tax Liability of Innocent Spouses After the IRS Reform Act

20TAX LIABILITY of Innocent Spouses After the IRS Reform ActBy Tracey GreenThe problem is not uncommon. One afternoon, a taxpayer goes through her mail and finds a tax notice from the IRS. Shocked, she discovers that the IRS is collecting taxes from a joint return she filed with her former husband many years ago. She contacts the IRS and states that she was unaware of the items causing the tax deficiency. Instead of obtaining relief, she learns that the deficiency was assessed against her former husband after an audit and he has disappeared, ma g collection from him impossible. Unsympathetically, the IRS states that she is fully responsible for the deficiency because spouses are jointly and severally liable for the taxes allocable to a joint return.

Introduction

Of all the hardship situations resulting from federal tax law, perhaps none have cried out for relief more than the imposition of liability on a spouse who was unaware of the transactions that resulted in the deficiencies. In previous years, the law has not been particularly sympathetic to these "innocent spouses."

Now, through the IRS Reform and Restructuring Act of 1997 (the IRS Reform Act), Congress has expanded the relief available to truly innocent spouses. Hopefully, the South Carolina General Assembly will adopt these new provisions for state tax liabilities.

Background

To qualify for innocent spouse relief under prior law, a taxpayer had to establish the following:

* That there was an understatement of tax exceeding $500 on a joint return filed with a current or former spouse;

* That the understatement was attributable to the other spouse;

* If the understatement arose from an improper deduction or credit, that it had no basis in fact or law;

* That the understatement exceeded a certain percentage of the taxpayer's adjusted gross income in the year immediately before the IRS determined a deficiency against the taxpayer;

* That the taxpayer neither knew nor should have known of the understatement when signing the return; and

* That it would be inequitable to hold the taxpayer liable for the understatement, taking into account all facts and circumstances.

See I.R.C. § 6013(e), repealed by IRS Reform Act. Because of these strict rules...