Innocent Spouse Relief—The
Picture Is Getting Clearer
Congress has expanded the Tax Court’s jurisdiction to hear appeals from spouses seeking equitable relief from joint tax liability. And the IRS has revamped Form 8857 in an effort to assist taxpayers in outlining the information necessary to assert and prove innocent spouse relief.
The innocent spouse doctrine was born out of the realization that, in some circumstances, it is inequitable to hold one spouse liable for a tax deficiency attributable to the actions of his/her spouse. IRC Section 6015 was enacted by Congress to address this issue and is designed to provide relief to a spouse whose income did not create the tax deficiency, who had no knowledge of the income or deduction that created the deficiency, and who did not significantly benefit from it. Relief can be pursued in three different ways.
Timely Election
A taxpayer can claim innocent spouse relief under the tax law by making and filing a timely election. Specifically, Form 8857 must be filed no later than two years after the date the IRS began collection activities regarding the individual making the election. Under IRC Section 6015(b), the taxpayer must also (1) file a joint return that has an understatement of tax due to “erroneous items” attributable to the non-petitioning spouse, (2) demonstrate that he or she did not know, and had no reason to know, that an understatement of tax existed and (3) show that it would be unfair—taking into account all the facts and circumstances—to hold the petitioning taxpayer responsible for the understatement of tax (IRS Publication 971, Innocent Spouse Relief).
Separation of Liability
Under the law, a taxpayer can also pursue relief by “separation of liability,” which allows the taxpayer to allocate any unpaid understatement of tax, penalties and interest between the taxpayer and the taxpayer’s non-petitioning spouse. It must be shown that the couple was either divorced or legally separated at the time Form 8857 was filed or that one of the spouses was deceased. Furthermore, the taxpayer cannot be a member of the same household as the estranged spouse at any time during the 12-month period ending on the date the election for innocent spouse relief was filed.
Equitable Relief
The IRS has wide latitude in deciding whether, taking into account all the facts and circumstances, to grant or deny equitable spousal relief from tax liability. However, it must be shown that no remedy is available under either IRC Section 6015(b) or (c). Furthermore, the IRS has issued Revenue Procedures 2000-15 (2000-1 CB 447) and 2003-61 (2003-2 CB 296), establishing additional requirements necessary for equitable relief.
Additional factors that the IRS will consider regarding whether to grant equitable relief include: (1) marital status, (2) economic hardship, (3) the taxpayer’s knowledge (did he or she know, or should he or she have reasonably known, about a tax liability or deficiency associated with the non-petitioning spouse?), (4) a legal obligation of the non-petitioning spouse to pay the outstanding income-tax liability and (5) any significant benefit, beyond normal support, the taxpayer received from the unpaid tax liability.
Tax Court
Previously, the Tax Court had no jurisdiction to hear cases involving equitable relief under IRC Section 6015(f) where no deficiency had been issued by the IRS. The Tax Relief and Health Care Act of 2006 allows Tax Court jurisdiction in those cases in which taxpayers incurred liability for taxes “arising or remain[ing] unpaid” after December 19, 2006. As a follow-up to the legislation, the IRS Chief Counsel issued procedures to provide guidance in undertaking IRC Section 6015(f) equitable relief cases.
Conclusion
Recent developments seem to indicate a policy shift toward protecting innocent spouses from tax abuses by a spouse or ex-spouse. A petitioner who suffers economic hardship and who does not benefit from the underpayment of a tax liability now has an increased chance of receiving equitable relief. Please contact a member of Somerset's Litigation & Valuation Team for your litigation support needs.
Congress has expanded the Tax Court’s jurisdiction to hear appeals from spouses seeking equitable relief from joint tax liability. And the IRS has revamped Form 8857 in an effort to assist taxpayers in outlining the information necessary to assert and prove innocent spouse relief.
The innocent spouse doctrine was born out of the realization that, in some circumstances, it is inequitable to hold one spouse liable for a tax deficiency attributable to the actions of his/her spouse. IRC Section 6015 was enacted by Congress to address this issue and is designed to provide relief to a spouse whose income did not create the tax deficiency, who had no knowledge of the income or deduction that created the deficiency, and who did not significantly benefit from it. Relief can be pursued in three different ways.
Timely Election
A taxpayer can claim innocent spouse relief under the tax law by making and filing a timely election. Specifically, Form 8857 must be filed no later than two years after the date the IRS began collection activities regarding the individual making the election. Under IRC Section 6015(b), the taxpayer must also (1) file a joint return that has an understatement of tax due to “erroneous items” attributable to the non-petitioning spouse, (2) demonstrate that he or she did not know, and had no reason to know, that an understatement of tax existed and (3) show that it would be unfair—taking into account all the facts and circumstances—to hold the petitioning taxpayer responsible for the understatement of tax (IRS Publication 971, Innocent Spouse Relief).
Separation of Liability
Under the law, a taxpayer can also pursue relief by “separation of liability,” which allows the taxpayer to allocate any unpaid understatement of tax, penalties and interest between the taxpayer and the taxpayer’s non-petitioning spouse. It must be shown that the couple was either divorced or legally separated at the time Form 8857 was filed or that one of the spouses was deceased. Furthermore, the taxpayer cannot be a member of the same household as the estranged spouse at any time during the 12-month period ending on the date the election for innocent spouse relief was filed.
Equitable Relief
The IRS has wide latitude in deciding whether, taking into account all the facts and circumstances, to grant or deny equitable spousal relief from tax liability. However, it must be shown that no remedy is available under either IRC Section 6015(b) or (c). Furthermore, the IRS has issued Revenue Procedures 2000-15 (2000-1 CB 447) and 2003-61 (2003-2 CB 296), establishing additional requirements necessary for equitable relief.
Additional factors that the IRS will consider regarding whether to grant equitable relief include: (1) marital status, (2) economic hardship, (3) the taxpayer’s knowledge (did he or she know, or should he or she have reasonably known, about a tax liability or deficiency associated with the non-petitioning spouse?), (4) a legal obligation of the non-petitioning spouse to pay the outstanding income-tax liability and (5) any significant benefit, beyond normal support, the taxpayer received from the unpaid tax liability.
Tax Court
Previously, the Tax Court had no jurisdiction to hear cases involving equitable relief under IRC Section 6015(f) where no deficiency had been issued by the IRS. The Tax Relief and Health Care Act of 2006 allows Tax Court jurisdiction in those cases in which taxpayers incurred liability for taxes “arising or remain[ing] unpaid” after December 19, 2006. As a follow-up to the legislation, the IRS Chief Counsel issued procedures to provide guidance in undertaking IRC Section 6015(f) equitable relief cases.
Conclusion
Recent developments seem to indicate a policy shift toward protecting innocent spouses from tax abuses by a spouse or ex-spouse. A petitioner who suffers economic hardship and who does not benefit from the underpayment of a tax liability now has an increased chance of receiving equitable relief. Please contact a member of Somerset's Litigation & Valuation Team for your litigation support needs.
This newsletter is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Steve Riddle,
Tom
Thieme,
Rex Collins or
Doug
Ayres
of our
Litigation & Valuation Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
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P.C.
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Indianapolis, Indiana 46240
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