There are two other situations that fall into the realm of Innocent Spouse, the Separate Spouse election and Equitable Relief.
Under the Separate Spouse election (§ Cod. Sec. 6015(c)) a requesting spouse may elect to be treated as if the joint return had been filed separately. The requesting spouse bears the burden of proof and eligibility requirements are very stringent as follows:
1. At the time of the election the requesting individual is no longer married to or is legally separated from the individual with whom the joint return was filed; or
2. The requesting individual was not a member of the same household as the individual with whom the joint return was filed at anytime in the 12 month period ending on the date the election is made.
3. The election must be made not later than 2 years from the date collection activities have begun.
4. The election will be determined not valid if it can be shown that the requesting individual had knowledge of any item that caused the deficiency (see item 3 in the previous section)
5. The requesting spouse does not assert that the return was signed under duress (covered under Equitable Relief below and not eligible under this subsection)
The manner in which the IRS determines the split liability of the spouses in this subsection, once the qualifications have been met, is similar to the way Injured Spouse allocations are made. We will discuss that in-depth in later in this course.
The last type of relief under the Innocent Spouse subsection is the Equitable Relief request. (Cod. Sec. 6015(f)) This is a catchall provision for spouses that do not qualify under subsection (b) or (c) above. As opposed to the hard and fast qualification of the previous sections this is more a facts and circumstances situation. The IRS will consider whether it is “fair” to hold the requesting spouse liable for the non-requesting spouses deficiency based on the facts and circumstances. The requesting spouse must meet all of the following threshold conditions in order to be considered under this subsection:
1. The requesting spouse must have filed a joint return for the taxable year in which relief is being sought.
2. Relief is not available to the requesting spouse under subsections above.
3. The claim for relief must be timely filed. A request is considered timely filed if the request is being made for the portion of the liability that remains unpaid and the request is made on or before the Collection Statute Expiration Date (CSED) as provided in Cod. Sec. 6502; or the request is filed for a claim of credit or refund as provided in Cod. Sec. 6511, whichever is later.
4. No assets were transferred between the spouses as part of a fraudulent scheme between spouses.
5. The non-requesting spouse did not transfer disqualified assets to the requesting spouse. (Cod. Sec. 6015(c)(4)(B)
6. The requesting spouse did not knowingly participate in the filing of a fraudulent return.
7. The liability from which the requesting spouse is seeking relief is attributable to the non-requesting spouse.
The IRS will consider many areas in making the above threshold determinations, however they will, at a minimum, consider the following:
1. The income on which the tax was paid did not benefit the innocent spouse beyond the payment of personal/family living expenses
2. Economic hardship would result if the innocent spouse were forced to pay the tax
3. The innocent spouse was abused or under some kind of undue influence (this consideration may mitigate the necessity of some of the mandatory threshold items above)
4. The innocent spouse was ignorant of or did not participate in the financial affairs of the family and did not participate in the decision making processes
5. The innocent spouse lacked the education or capacity to understand the financial circumstances
6. Any other facts or circumstances that would lead to the IRS determining that it would be “inequitable” or “unfair” to hold the innocent spouse liable for the tax
Recent IRS Revenue Procedure 2013-34 has made significant changes to this facet of the Innocent Spouse program. You will notice that in the first two types of relief there is a two year time limit from the time the collection activity is started on filing the request. No longer so for the Equitable Relief standard. IRS Notice 2011-70 started the change under the Equitable Relief standard and it was formalized in Rev. Proc. 2013-70.
Tomorrow we will talk about the Injured Spouse procedures.