This is the ninth post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.
Innocent Spouse/Separation of Liability/Equitable Relief. IRC 6015. The tax liability on a joint return will often be the result of the conduct of just one of the spouses, but, unfortunately, because they filed a joint return, they are both presumed to be responsible. For example, a wife is an employee who is having taxes withheld while her husband has his own business and is required, but has failed, to pay estimated taxes, resulting in a significant liability of tax, penalty and interest. Normally, in this situation, they will both be responsible for the liability. However, there are some situations when one of the spouses to a joint liability will be deemed an “innocent or injured spouse.” There are three types of relief available for a spouse.
Innocent Spouse Relief.
Understatement. There is an understatement of tax attributable to erroneous items of one spouse filing the return; (Erroneous items include unreported income and incorrect deductions, credit or basis.)
Lack of Knowledge. The spouse establishes that in signing the return, she did not know (and had no reason to know) that there was such an understatement;
Fairness. It would be unfair to hold the innocent spouse liable for the deficiency, taking into account all the facts and circumstances. In determining if it is unfair to hold a spouse responsible for an understatement, the IRS considers many factors including:
i. whether the spouse received any significant benefit from the understatement of tax. Examples of significant benefits are expensive vacations, jewelry or clothing that exceed the innocent spouse's normal lifestyle. ii. Whether the “innocent spouse” was later divorced from or deserted by his or her spouse. If these conditions are satisfied, the innocent spouse may be relieved of the liability.
Separation of liability. This type of relief allocates the understatement of tax based on the amount for which each spouse is responsible. To qualify for this option, the spouses must be either divorced, legally separated or not a member of the same household at any time during the twelve-month period before they request the separation of liability. Even if the spouse meets the above-mentioned requirements, the IRS can reject his or her request in the following situations:
Fraud. The IRS proves that assets were transferred between the joint filers as part of a fraudulent scheme.
Knowledge. The IRS proves the individual seeking relief had actual knowledge of any item giving rise to a deficiency not allocable to her (unless she signs the return under duress).Avoidance. The IRS proves the individual seeking relief transferred property to her spouse (or former spouse) just to avoid tax or the payment of tax.
Equitable relief. If a spouse is not eligible for Innocent Spouse relief or Separation of Liability, he or she still may be relieved of the tax through Equitable relief. Simply stated, this means that taking into account all the facts and circumstances, it would be unfair to hold the spouse liable for the understatement or underpayment of tax. As discussed above under Innocent Spouse relief, the IRS will be looking for indicators of fairness like whether the spouse received any significant benefit from the understatement or whether the spouse was later divorced from or deserted by her spouse.