Innocent or Injured Spouse

Relief from Joint and Several Liability § 6015

Married taxpayers who file jointly are jointly and severally liable for any tax, interest and penalties due as shown on the return. § 6013(d)(3). This is true even if the taxpayers later divorce, or if the other spouse earned all the income. Relief from joint and several liability may be available under IRC § 6015. The Innocent Spouse provisions should not be confused with an Injured Spouse claim (discussed below) filed using Form 8379 to receive an allocation of an overpayment.

In 1998, Congress amended prior law and provided three forms of relief from joint and several liability. Before the amendment, more limited relief was available. § 6015:

Innocent Spouse Relief - § 6015(b)
Separation of Liability - § 6015(c)
Equitable Relief - § 6015(f)

Guidance on the administrative appeals rights for the non-requesting spouse is contained in Rev. Proc. 2003-19.

Innocent Spouse Relief § 6015(b)

To receive "innocent spouse relief" the taxpayer must:

File a joint return that had an "understatement" (not merely an underpayment) of tax due to "erroneous items" ofone of the spouses.
Establish that at the time he signed the joint return he did not know, and had no reason to know, that there was an understatement of tax;
Prove that taking into account the facts and circumstances, it would be unfair to hold the taxpayer liable for the
understatement of tax, and
Request relief no later than two years after collection activity begins.

If it is established that the taxpayer signed a joint return under duress, then a joint return has not been filed.

Understatement of Tax: An understatement of tax is generally the difference between the total tax liability that should have been shown on the return and the amount that was actually shown on the return. § 6662(d)(2)(A). It is to be compared with underpayment.

Underpayment of tax: An underpayment of tax is an amount of tax the taxpayer properly reported on the return but has not paid. For example, a joint 2000 return shows that the taxpayer and his spouse owe $5,000. They paid $2,000 with the return. They have an have an underpayment of $3,000.

A taxpayer may qualify for partial relief if, under § 6015(b), at the time she filed her return, she knew or had reason to know, that there was an understatement of tax due to her spouse's erroneous items, but she did not know how large the understatement was. She will be relieved of the understatement to the extent she did not know about it and had no reason to know about it.

Erroneous items are either of the following:

Any gross income item received by the spouse that is not reported.
Any improper deduction, credit, or property basis claimed on the return.

The following are examples of erroneous items:

The expense for which the deduction is taken was never paid or incurred. For example, the non-requesting spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C (Form 1040), but never paid for any advertising.
The expense does not qualify as a deductible expense. For example, the spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.
No factual argument can be made to support the deductibility of the expense. For example, the non-requesting spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for the family's two dogs.

Knowledge or reason to know: Regulation § 1.6015-2(c) states that a requesting spouse has knowledge or reason to know of an understatement if he or she actually knew of the understatement, or if a reasonable person in similar circumstances would have known of the understatement. Facts and circumstances considered in determining whether a requesting spouse had reason to know of an understatement include, but are not limited to:

The nature of the erroneous item and the amount of the erroneous item relative to other items;
The couple's financial situation;
The requesting spouse's educational background and business experience;
The extent of the requesting spouse's participation in the activity that resulted in the erroneous item;
Whether the requesting spouse failed to inquire, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question; and
Whether the erroneous item represented a departure fro a recurring pattern reflected in prior years' returns.

Indications of unfairness: The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold the taxpayer responsible for the understatement. Two indicators the IRS may use in deciding that it is unfair to hold the taxpayer responsible are whether she:

Received any significant benefit from the understatement of tax,
- Taxpayer can receive significant benefit either directly or indirectly. For example, if the spouse did not report $10,000 of income on the joint return, the taxpayer can benefit directly if the spouse shares that $10,000 with her. She can benefit indirectly from the unreported income if the spouse uses it to pay extraordinary household expenses.
- The taxpayer does not have to receive a benefit immediately for it to be significant. For example, money the spouse gives the taxpayer several years after he received it or amounts inherited from the spouse (or former spouse) can be a significant benefit.
- Support payments that the taxpayer receives as a result of a divorce proceeding are not a significant benefit.
Was later divorced from or deserted by the spouse.

Relief By Separation of Liability § 6015(c)

Under this type of relief, there is an allocation of the understatement of tax (plus interest and penalties) on the joint return between the taxpayer and the spouse (or former spouse). The understatement of tax allocated to the taxpayer is generally the amount he or she is responsible for. Taxpayers may request this type of relief in addition to innocent spouse relief.

Requirements: To request relief by separation of liability, a taxpayer must have filed a joint return and must meet one of the following requirements at the time he or she files Form 8857:

The taxpayer must no longer be married to, or is legally separated from, the spouse with whom the joint return was filed for which relief is requested. (Under this rule, taxpayer is no longer married if he is widowed.) or
Taxpayer must not be a member of the same household as the spouse with whom the joint return was filed at any time during the 12-month period ending on the date he files Form 8857.

Invalid requests: Even if the taxpayer meets the requirements above, a request for separation of liability will not be granted in the following situations:

1.   Fraudulent transfers.  The IRS proves that the taxpayer and her spouse transferred assets to third parties as part of a fraudulent scheme.
2.   Actual knowledge.  The IRS proves that at the time the taxpayer signed the joint return, she had actual knowledge of any items giving rise to the deficiency that were allocable to the spouse.
3.   The spouse (or former spouse) transferred property to the taxpayer to avoid tax or the
payment of tax.

If it is established that the taxpayer signed the joint return under duress, then it is not a joint return, and the taxpayer is not liable for amounts from that return. However, the taxpayer may be required to file a separate return for that tax year.

Transfers of property to avoid tax: If the spouse transfers property to the taxpayer for the purpose of avoiding tax or payment of tax, the tax liability allocated to the taxpayer will be increased by the value of the property transferred. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is one year before the date on which the IRS sent its first letter of proposed deficiency allowing the taxpayer an opportunity for a meeting in the IRS Appeals Office. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if the taxpayer establishes that the transfer did not have as its main purpose the avoidance of tax or payment of tax.

Equitable Relief § 6015(f)

If the taxpayer does not qualify for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income, the taxpayer may still be relieved of responsibility for tax, interest, and penalties through the IRS provisions for equitable relief.

Requirements: The taxpayer may qualify for equitable relief if all of the following conditions are met:

The taxpayer is not eligible for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income
The taxpayer and the spouse did not transfer assets to one another as a part of a fraudulent scheme
The spouse did not transfer assets to the taxpayer for the main purpose of avoiding tax or the payment of tax
The taxpayer did not file the return with the intent to commit fraud.
The taxpayer establishes that, taking into account all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement or underpayment of tax.

Unlike innocent spouse relief or separation of liability, the taxpayer can get equitable relief from both an understatement of tax (defined earlier under Innocent Spouse Relief) or an underpayment of tax.

A taxpayer may be able to receive a refund of:

Amounts paid after July 21, 1998 and before April 16, 1999
Certain installment payments made after she files Form 8857

Indications of "unfairness" for equitable relief:

The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold the taxpayer responsible for the understatement or underpayment of tax. The IRS will consider all factors and weigh them appropriately. There are positive and negative factors.

Positive factors
The following are examples of factors that weigh in favor of equitable relief:
1. Taxpayer is separated (whether legally or not) or divorced from the spouse.
2. Taxpayer would suffer economic hardship and would not be able to pay reasonable basic living expenses if relief is not granted.
3. Taxpayer was abused by the spouse, but the abuse did not amount to duress.
4. Taxpayer did not know and had no reason to know about the items causing the understatement or that the tax would not be paid
5. The taxpayer's spouse or ex-spouse has a legal obligation under a divorce decree or agreement to pay the tax. This will not be a positive factor if the taxpayer knew, or had reason to know, at the time the divorce decree or agreement was entered into, that the spouse would not pay the tax.
6. The tax for which the taxpayer is requesting relief is attributable to the spouse.

Negative factors
The following are examples of factors that weigh against equitable relief:
1. Taxpayer will not suffer economic hardship if relief is not granted.
2. Taxpayer knew, or had reason to know, about the items causing the understatement or that the tax would be unpaid at the time he signed the return.
3. Taxpayer received a significant benefit from the unpaid tax or items causing the understatement.
4. Taxpayer has not made a good faith effort to comply with Federal income tax laws for the tax year for which he is requesting relief or the following years.
5. Taxpayer has a legal obligation under a divorce decree or agreement to pay the tax.
6. The tax for which taxpayer is requesting relief is attributable to him.

How To Request Relief

To request for Innocent Spouse Relief, Separation of Liability, or Equitable Relief, the IRS requires taxpayer to complete and file IRS Form 8857. The taxpayer only needs to file one Form 8857, even if she is requesting relief for more than one tax year. The taxpayer must attach a statement to Form 8857 explaining why she believes she qualifies for relief and attach thereto supporting exhibits. She must also provide certain information for each type of relief she is requesting. The instructions for Form 8857 offers more information pertaining to the required information.

The IRS is required to inform the spouse (or former spouse) if taxpayer requests innocent spouse relief or separation of liability and to allow the spouse (or former spouse) to participate in the determination of the amount of relief from liability. You should inform your client that the IRS will attempt to contact his or her former spouse and advise him or her of the request for relief. To protect victims of domestic abuse, the IRS has adopted several measures. You should consult the IRS web site in this situationand write on the top of Form 8857 "Potential Domestic Abuse Case."

Tax Court Review of Request

Within 90 days after the taxpayer is mailed a negative final determination notice indicating that the relief requested has been denied, she may ask the U.S. Tax Court to review the denial. This is a statutory period of time that may not be extended. If taxpayer does not file a petition, or files it late, the Tax Court cannot review the request for relief.

An appeal of an IRS denial of spousal relief may be conducted under the small tax case procedures only if the amount of relief sought, including accrued but unassessed interest and penalties, does not exceed $50,000 on the date the petition is filed. Otherwise, the petition for review of the IRS' denial of relief must be filed under the regular procedure.

A taxpayer may also file a petition in U.S. Tax Court if she has not received a final determination notice from the IRS within 6 months from the date he or she filed Form 8857.

Refund potential:

Refunds of tax are limited if innocent spouse relief under § 6015 is granted, as follows:

A refund is available if relief is granted under § 6015(b);
No refunds are available if relief is granted under § 6015(c);
Limited refunds are available if relief is granted under § 6015(f). Refunds are only permitted for amounts paid between 7/22/98 and 4/15/99 and amounts paid under an installment agreement after the Form 8857 "Request for Innocent Spouse Relief", is filed.

When Request May be Filed:

A request for relief under § 6015(b) and (c) but not (f) must be filed no later than 2 years from when first collection activity begins after 7/22/98. § 6015(b)(1)(E), (c)(3)(B);

Reg.§ 6015-5(b) currently provides that the 2 year limit on relief applies to relief requested under § 6015(f); however, the Notice 2011-70, 2011-32 I.R.B. (see link below) revokes so much of the above regulation as limits § 6015(f) claims to a 2 year period. The Commissioner in Issue Number: IR-2011-80 (see link below) made this Notice effective immediately and retroactively.

Previously, the IRS was successful at the Circuit Court level in sustaining the the 2 year limitation period under Reg § 1.6015-5(b)(1). Lantz v. Commissioner 607 F.3d 479 (7^th Cir.. 2010.§ 1.6015-5(b)(1)§ 1.6015-5(b)(1)Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011); Jones v. Commissioner, 642 F.3d 459 (4^th Cir. 2011). (#3 2010 TNT 110-3, June 8, 2010(#3 2010 TNT 110-3, June 8, 2010Notice 2011-70 (see link below) will be incorporated in a revision to the regulation in the future. The Notice provides :

Future Reqeusts: Individuals may request equitable relief under section 6015(f) after the date of the notice without regard to when the first collection activity was taken. Request must be filed within the period of limitation on collection in section 6502 (10 year statute of limitations on collection) or, for any credit or refund of tax, within the period of limitation in section 6511.
Requests Pending: For any requests pending as of July 25, 2011 with the IRS, the IRs will consider requests for equitable reflief even if the request was submitted more than 2 years after the first collection activity was taken as sonlg as the applicable period of limnitation under 6502 and 6511 is open. Individuals with requests pending do not have to reapply.
Requests that were previously denied solely for untimeliness and not litigated: Individuals should reapply for refief under 6015(f) after the effective date by completing a new Form 8857. IRS will treat the original 8857 as a claim for refund for purposes of the period of lilmitation on refudns provided by section 6511. IRS can only grant relief if the collection period under 6502 remains open on the date of reapplication for relief.
Requests in Litigation: All cases that raised this issue that are currently pending will be resolved based on this Notice.
Reqeusts that were in litigation and that ligation is now final: The Notice provides the terms under which the IRS will take no further collection action if the IRS agreed that but for the 2 year period, the individual was entitled to relief under 6015(f[w1] ).

Likewise, the Chief Counsel has issued Notice CC-2011-017 (linked below) providing instructions to Chief Counsel Attorneys and specifically superseding CC Notices CC_2009-012 (April 17, 2009) CC-2010-005( March 12, 2010), and CC-2010-011 (June 18, 2010).

Collection activity, for this purpose, begins when the requesting spouse receives:

A (§ 6330) "Notice of Intent to Levy";
An offset of an overpayment of the requesting spouse against a liability, per (§ 6042); or
The filing of a claim by the federal government in a court proceeding in which the requesting spouse is a party or which involves property of the requesting spouse.

Collection activity does not include:
- A "Notice of Lien" (§ 6320), or
- A "Notice and Demand for Payment" (§ 6303)

INJURED SPOUSE

An "Injured Spouse" should not be confused with an "Innocent Spouse". A taxpayer who has filed a joint return with her spouse and all or part of her share of an overpayment was applied against her spouse's past-due Federal tax liability, child or spousal support, Federal nontax debt or state income tax may file a claim as an injured spouse to request a refund of the amount of offset. For example, if a spouse is in arrears on his child support, it is possible that any refund generated by the filing of a joint tax return, may be withheld by the IRS and applied toward the arrearage.

A spouse who has income and withholdings or estimated tax payments and who files a joint return with an individual who owes past-due child support must file a request for a refund of his or her allocation of the joint return refund (Form 8379, Injured Spouse Claim and Allocation).

Requirements:

The taxpayer seeking relief is not required to pay the past due amounts; rather, the spouse in default is responsible for the debt
The taxpayer reported income such as wages, taxable interest, etc. on the joint return
The taxpayer made and reported payments such as Federal income tax withheld from taxpayer's wages or estimated tax payments or the taxpayer claimed the Earned Income Tax Credit or other refundable credit
Form 8379 is filed.

Resources

Relief at a Glance Chart

Sample Innocent Spouse Memorandum

Innocent Spouse Questionnaire

Revenue Procedure 2003-61 - Links to IRS Bulletin 2003-32 which contains the new rules for applying for innocent spouse relief under Code Section 6015(f). You will need to scroll down to page 296 (p.13 of 65).

Internal Revenue Service Innocent Spouse Checklist

Chief Counsel Advice - Grant of Innocent Spouse Relief Does Not 'Abate' Tax Liability

Chief Counsel Advice - Advises attorneys on handling of Tax Court cases in light of Lanz.

Change in Litigating Position on the Two-Year Deadline to Request Section 6015(f) Equitable Relief - CC-2011-17

Two-Year Limit No Longer Applies to Many Innocent Spouse Requests - IR-2011-80

Equitable Relief under Section 6015(f) - August 8, 2011 - Notice 2011-70

Internal Revenue Code

IRC §66(c)	Treatment of community income: Spouse relieved of liability in certain other cases
IRC §6013	Old section of code relating to Innocent Spouse relief
IRC §6015	Relief from joint and several liability on joint return

IRS Forms and Publications

Form 8857	Request for Innocent Spouse Relief
IRS Publication 971	Innocent Spouse Relief
Form 12509	Statement of Disagreement
Innocent Spouse	On-line Self Help Tool (Start)