A topic that we frequently see in the Tax Clinic that I run, one that is often misunderstood, is that of innocent spouse relief.

Generally, the purpose of providing innocent spouse relief is to, as one court put it:  “protect one spouse from the overreaching or dishonesty of the other.”  Purcell v. Commissioner, 826 F.2d 470 (6th Cir. 1987).  But many people that come into the clinic think that it means that, if the other spouse earned the income, then they are automatically entitled to innocent spouse relief when the appropriate amount of tax does not get paid.  And that is simply not the case.

As I always do with my students, the place to start is the Internal Revenue Code, and the primary section we’re looking at as it relates to innocent spouse relief is Section 6015 – “Relief from joint and several liability on joint return.”  So Section 6015 starts with the lead-in of “Notwithstanding Section 6013(d)(3)”, so let’s start our analysis there:

Section 6013 generally deals with joint returns by a husband and wife.  Section 6013 (d) provides that, “for purposes of this section” (that’s the section related to joint returns), and then (d)(3) says that “if a joint return is made, the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several.”  For those unfamiliar with the concept of joint and several liability, it’s one that frequently arises in the context of tort litigation, and it simply means that the IRS can go after either spouse for the full amount of the tax – notwithstanding:  (1) Who earned the money; (2) Who was responsible for the finances; or (3) Who was responsible for preparing and filing the returns.

So now we jump back to §6015, and we see that §6015 is going to give us a rule that applies notwithstanding the general rule that both spouses are jointly and severally liable for the entire amount of the tax.  §6015(a) points us to two avenues for relief under §6015 – one described in §6015(b) and another described in §6015(c).  We’ll see that there is a third avenue described in §6015(f).

Relief under §6015(b)

So we’ll start with relief under §6015(b), which provides in §6015(b)(1) that, if a taxpayer satisfies five (5) separate requirements, then a spouse can be relieved of liability to the extent the section applies.  Those requirements are as follows:

• Requirement #1:  (A) requires that a joint return have been made for the taxable year.
  • That’s generally a pretty easy one to satisfy.
• Requirement #2:  (B) provides that “on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return”
  • So we’ve got a couple of requirements there:
    • First there has to be an understatement;
    • Second, that understatement has to be attributable to erroneous items of one of the individuals filing the return.
  • So as you can probably imagine, the fact scenarios under Section 6015 are all over the board, but in general, the tax items for which relief is sought must relate to the non-petitioning spouse.
• Requirement #3:  (C) says that the “other individual” filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement.
  • For starters, the “other individual” is the spouse seeking relief.
  • Next, the taxpayer must show that he or she “did not know”.  This is the requirement that is often the most difficult element to establish;
    • Cases interpreting this element have held that a spouse seeking relief knows of an understatement of tax if he or she knows or has reason to know of the transaction that gave rise to the understatement.  Guth v. Commissioner, 897 F.2d 441 (9^th Cir. 1990); Cheshire v. Commissioner, 282 F.3d 326 (5^th Cir., 2002)
    • Knowledge of the transaction has been found to include:
      • Knowledge of working for a particular entity.  Becherer, 88 T.C.M. 617 (T.C., 2004)
    • For example, if a wife knows that her husband owns corporate stock, but does not know that a dividend was paid, the wife’s knowledge of her husband’s stock ownership does not equate to actual knowledge of the receipt of the dividend.  Comes from Reg. Section 1.6015-3(c)(2)(iii)
    • Facts and circumstances that are taken into consideration include (see Treas. Reg. 1.6015-2(c)):
      • The nature of the erroneous item;
      • 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;a dn
      • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns
• Requirement #4:  (D) says that, taking account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such TY attributable to such understatement;
  • What are those facts and circumstances?  Well, cases have looked at (and Treas. Reg. 1.6015-2(d) lays out):
    • (1) Whether there has been a significant benefit to the spouse claiming relief; and
      • Evidence of direct or indirect benefit may consist of transfers of property or rights to property;
    • (2) Whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse.
    • (3) Whether the requesting spouse has been deserted by the nonrequesting spouse;
    • (4) Divorce or separation of spouses;
      • Here, I’ll point out that, when we look at 6015(f), we’ll see an independent basis for obtaining equitable relief, but here we see that at least some of those requirements must be satisfied as it relates to this avenue for relief under 6015(b)(2); and finally
• Requirement #5:  (E) provides that the individual elects the benefits of this subsection but not later than the date which is 2 years after the date the IRS has begun collection activities with respect to the individual making the election.

Relief Under §6015(c)

As noted above, a second route for obtaining relief under §6015 is found in §6015(c), which provides that a taxpayer who is eligible and so elects may limit his or her liability to the portion of a deficiency that is properly allocable to the other taxpayer as provided in section §6015(d).  This type of relief permits a requesting spouse who is widowed to elect to limit the tax liability to the amount of deficiency that is allocable to him or her only.  A requesting spouse may remain liable for deficiencies not allocable to him if he is found to have had actual knowledge of the erroneous item resulting in the deficiency.  Actual knowledge in this context is determined the same way it is when requesting regular relief.

One exception to the denial based on actual knowledge is in circumstances where domestic abuse prevented the spouse from challenging the erroneous item as a result of a fear of retaliation.

So 6015(c) basically allows the petitioning spouse (the one seeking relief) to go back and pretend as if he or she was filing a separate return.

Relief Under §6015(f)

So finally we turn to the third and final avenue for relief under §6015, and that is found in §6015(f).  Section 6015(f) provides a savings provision whereby, if the IRS determines that it’s simply unfair under all the facts and circumstances to hold one spouse liable – notwithstanding that individual’s failure to satisfy (b) or (c), that the IRS can relieve that individual of liability.

Equitable relief under §6015(f) is available only when a spouse fails to obtain regular or separate return relief.  In the case that the tax has not been paid, any such relief under 6015(f) must be requested prior to the expiration of the applicable statute of limitations under §6502, which is generally 10 years after the assessment (6015(f)(2)(A)).  Where the tax has already been paid, then relief must be requested during the period in which the individual could submit a timely claim for refund, which is determined under § 6511(a) as the later of:  (1) 3 years from the date of filing the return; or (2) years from the time the tax is paid.

A spouse may obtain equitable relief under §6015(f) if the facts and circumstances would make it inequitable to hold her liable for an underpayment or deficiency.  Factors used in making this determination have been memorialized in an IRS Revenue Procedure.  Rev Proc. 2013-34 provides a nonexclusive list of factors for consideration in determining whether relief should be granted, including:

• Marital status
• Economic hardship
• Knowledge or reason to know
• Legal obligation
• Significant benefit
• Compliance with income tax law
• Mental or physical health

Making an Innocent Spouse Claim

So if we determine that we may qualify for innocent spouse relief, how do we make such a claim?  Form 8857 is the appropriate form, and the instructions generally walk through completing it.  The from walks through a series of questions intended to determine under which provided described above the taxpayer is seeking relief.  Questions are tailored to seek information specific to each avenue of relief.  If you need additional assistance, you can turn to IRS Publication 971, which describes in extensive detail the full process for applying for innocent spouse relief.

So while obtaining innocent spouse relief may not be as simple as many believe, there are multiple avenues for relief designed to address situations where holding one spouse liable for a couple’s full tax liability is deemed to be unfair.

Have a question? Contact Greg Mitchell, Freeman Law, Texas.