When I Look in the Mirror, is an “Innocent Spouse” Looking Back?
By: Steven L. Jager, CPA, MST, USTCP | Fineman West & Company LLP
When couples are married, they will usually make the election to file jointly, as that filing status is generally most beneficial. But the risk is that each spouse is jointly and severally liable for the full amount of tax on the married couple’s combined income, PLUS any additional tax that may be assessed by the Internal Revenue Service if that joint tax return is later audited. This means, of course, that the IRS can collect the entire amount of tax from either spouse, regardless of which spouse that income is attributable to. And as for any penalties, they too, are collectible against either or both spouses. Ouch!
Congress, however, understood that this result can sometimes be too harsh, in those circumstances where one spouse may be “innocent,” and wrote into the tax code the possibility for relief in Code Section §6015.
What does an Innocent Spouse Look Like?
Contrary to popular belief, an Innocent Spouse is not always the wife – but historically, has been, as the law was originally contemplated to aid mobsters’ wives who may have been too intimidated to refuse to sign the tax return put in front of them. While that “traditional” type of relief is certainly still available – known as §6015(b) relief, relief is also available in situations where the spouses are no longer married [including widows/widower; those who are legally separated or have lived apart for the prior 12 months] – known as “separation or allocation of liability” or §6015(c) relief, and, finally, in those circumstances where the IRS is persuaded that it would be inequitable to hold the innocent spouse liable for the joint tax – known as “equitable” relief or §6015(f) relief.
(i) The “Traditional” Innocent Spouse – §6015(b)
This spouse is the spouse that has no knowledge of any of the issues on the tax return that were incorrect (i.e. unreported income or overstated deductions), and had no reason to know of the inaccuracies in the tax return as filed. To qualify, this Requesting Spouse must show NOT ONLY that he/she did not know, but also that there was nothing that should have made him/her suspicious. Circumstances, such as physical or emotional abuse or intimidation are very persuasive in leading to relief.
(ii) Separation or Allocation of Liability – §6015(c)
This spouse is no longer married to the “non-requesting” spouse, and is based upon an allocation limiting the requesting spouse’s liability to only the portion of the liability that “belongs” to that spouse. The tax is essentially re-calculated as if each spouse had filed separate tax returns. The requesting spouse is generally only liable for the tax on the income and expenses which are attributable to that spouse. For example, he/she would only be liable for the tax on any unreported wage or salary income to the extent that he/she earned that income.
Even under this allocation pathway to relief, relief will generally not be granted if the IRS can prove that the requesting spouse actually knew about those items when he/she signed the tax return, UNLESS he/she signed the tax return under duress.
(iii) Equitable Relief – §6015(f)
There are two pathways possible for this equitable relief. The first is for those situations in which the IRS has not assessed any further deficiency – i.e. the tax return was simply filed, tax was due but was simply unpaid, equitable relief is the only relief available, but only if the requesting spouse can demonstrate that, when the tax return was filed, he/she did not know, nor had any reason to believe that the tax would not be paid, and such belief must be reasonable. In other words, the requesting spouse must genuinely have believed that the non-requesting spouse would pay the tax, and that the tax is owed through no fault of the requesting spouse.
The second pathway is for those situations where there is a deficiency, but relief is not otherwise available as under either the “traditional” relief provision or the separation/allocation of liability provision, but it would be clearly inequitable to hold the requesting spouse liable.
The Time To Ask is Now!
Spouses who believe they may be eligible for relief should not wait or delay as requests for relief must be “timely.” For relief under either §6015(b) or §6015(c), the request must be made no later than 2 years after the IRS begins trying to collect the tax. Determining when the IRS has begun its “collection activity” is another term of art that is not necessarily intuitive, but generally includes when the IRS has issued the Notice that offers an Appeals conference to protect one’s rights from the harshest collection activities. For relief under §6015(f), the request must be made before the expiration of the collection Statute of Limitations for the year where relief is requested, which is generally within 10 years of the assessment of the tax.
Relief is requested by filing IRS Form 8857 and having LOTS of patience! All requests for relief (as is true of most documents filed with the IRS which are time sensitive) should always be filed by using Certified Mail, and be sure to keep the receipt which is stamped by the post office [i.e., the “round stamp”]. That postmark will be golden in proving when the request was made, and also sets the timeline for when the requesting spouse can file a lawsuit in the United States Tax Court. The law imposes upon the Internal Revenue Service their responsibility to make a decision quickly, and if they have not acted and issued their determination within 6 months, then the requesting spouse can file his/her Petition with the United States Tax Court asking that the case be decided by the Court.
Other Considerations and Issues to Ponder
Once a request is made and the IRS has made its initial determination, they are required to notify the Non-Requesting Spouse and he/she has the right to “weigh-in.” The non-requesting spouse is then known as the “Intervenor” and this can add a significant emotional cost for the Spouse who is seeking relief. These cases, especially in those circumstances where there has been emotional or physical abuse, can become excruciatingly painful for all the parties involved.
Any spouse considering making a request for relief should carefully consider not going to the IRS alone. A knowledgeable Tax Lawyer, CPA or Enrolled Agent should be retained to represent the innocent spouse, and there are other ways to invoke one’s (innocent spouse) plea as a defense to other IRS collection actions. Moreover, the recent Tax Act known as the “Taxpayer First Act,” which was signed into law on July 1, 2019, made some (perhaps unintended but) enormous changes to innocent spouse relief and it is critical to now approach any innocent spouse claims with even greater awareness of creating an “administrative record” which documents all of the elements needed to prove every claim. Prior to this latest Tax Act, many of these elements could be proved at Trial, if litigation in the Tax Court was needed, but NOW these items must be able to be shown as having been clearly brought to the attention of the IRS at the earliest stage (before any action in the U.S. Tax Court), and this is unlikely to happen without the assistance of a very competent professional who is knowledgeable and sensitive to these issues.
