Innocent Spouse Tax Relief

What is an “Innocent Spouse”?

Sometimes one spouse dies before the other spouse discovers the unreported income or “creative/aggressive” tax planning. Sometimes, one spouse has filed a bankruptcy petition before discovering the problem. Sometimes it is the wife who underpaid taxes, and sometimes it is the husband.

The common problem is that the IRS is trying to garnish wages or attach bank accounts simply because you filed a joint tax return with a spouse who underreported income – and you didn’t know.

As part of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), Congress changed the Internal Revenue Code to make obtaining “innocent spouse relief” easier.

• Innocent Spouse Rules

  The Innocent Spouse rules provide for three types of relief:

  • General liability relief is available under 6015(b).
  • Allocated liability relief is available under 6015(c), and
  • Equitable relief is available if you fail to qualify for one of the first two relief types.

 

• General Liability or 6015(b) Relief

  A requesting spouse may elect relief from joint and several liabilities if:

  • The couple filed a joint return;
  • The return had an understatement of tax attributable to erroneous items of the spouse (non-requesting spouse);
  • The requesting spouse establishes that they had no knowledge or reason to know that there was an understatement of tax when they signed the return;
  • It would be inequitable (unfair) to hold the requesting spouse liable for the understatement; and
  • The requesting spouse elects 6015(b) relief no later than two years after the date of the first collection activity after July 22, 1998.

 

• Allocated Liability or 6015(c) Relief

  A requesting spouse may elect to allocate a deficiency between the spouses if:

  • The couple filed a joint return;
  • The requesting spouse is no longer married to, is legally separated from, or has not been a member of the same household as the non-requesting spouse at any time during the 12 months ending on the date the 6015(c) election was filed;
  • The application is filed no later than two years after the date of the first collection activity after July 22, 1998; and
  • The deficiency remains unpaid.

 

• Equitable Relief

  Suppose a spouse does not qualify for either 6015(b) Relief or 6015(c) Relief. In that case, the IRS is authorized to grant “equitable relief” if it determines that holding a requesting spouse liable for any unpaid tax or deficiency would be inequitable. The IRS will generally grant equitable relief for unpaid joint return liability if:

  • The requesting spouse is no longer married or is legally separated from the non-requesting spouse or has not been a member of the same household as the non-requesting spouse for 12 months;
  • The requesting spouse had no knowledge or reason to know that the tax would not be paid when the return was signed and established that it was reasonable to believe that the non-requesting spouse would pay the reported liability; and
  • The requesting spouse will suffer economic hardship if relief is not granted.

The IRS will consider several factors before determining whether to grant equitable relief. Some of the factors (positive and negative) include:

• Equitable Relief Factors
  • Positive factors:
    (1) requesting spouse is separated or divorced from the non-requesting spouse; (2) requesting spouse would suffer economic hardship if relief from the liability is not granted; (3) requesting spouse was abused by the non-requesting spouse (but the abuse did not amount to coercion; (4) requesting spouse did not know and had no reason to know of the item or that the liability would not be paid; (5) the non-requesting spouse has a legal obligation under a divorce decree or agreement to pay the outstanding liability; (6) liability is solely attributable to the non-requesting spouse.
  • Negative factors:
    (1) the liability is attributable to the requesting spouse; (2) the requesting spouse knew or had reason to know of the item or that the reported liability would be unpaid at the time the return was signed; (3) the requesting spouse has significantly benefited from the unpaid liability or items giving rise to the deficiency; (4) the requesting spouse will not experience economic hardship if relief from the liability is not granted; (5) the requesting spouse has not made a reasonable faith effort to comply with federal income tax laws in the tax years following the tax year(s) in question; (6) the requesting spouse has a legal obligation under a divorce decree or agreement to pay the liability.