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IRS Innocent Spouse Relief Questions - Innocent Spouse Tax Relief Rules
What is the effective date of the new innocent spouse tax relief rules under IRC 6015?
Innocent spouse relief rules are effective for:
- Unpaid balances as of July 22, 1998
- Liabilities arising after July 22, 1998
What is joint and several liability?
- Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows.
- Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce.
- This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.
- One spouse may be held responsible for all the tax due.
How can I get relief from joint and several liability?
- Relief now falls into three categories-
- Innocent Spouse Relief
- Separation of Liability
- Equitable Relief
- Each of these kinds of innocent spouse relief has different requirements.
Does the non-requesting spouse have any appeal rights?
- Per Rev. Proc. 2003-19, the non-requesting spouse has the right to appeal the preliminary determination to grant partial or full relief to the requesting spouse when the preliminary determination letter is issued April 1, 2003 or later.
- However, the non-requesting spouse may not petition the Tax Court from the final determination letter.
- If relief is denied in part or in full, and the requesting spouse petitions the U.S. Tax Court, the non-requesting spouse, by law, will be given the opportunity to become a party in that proceeding.
- For claims where a preliminary determination was issued prior to April 1, 2003, the non-requesting spouse had no appeal rights when the preliminary determination letter granted relief in part or in full to the requesting spouse.
- If relief was denied and the requesting spouse petitioned the U.S. Tax Court, the non-requesting spouse, by law, was given the opportunity to be a party in that proceeding.
Will the other spouse be notified that I filed a claim for innocent spouse relief?
- The IRS is required to notify the non-requesting spouse to allow them to participate for IRS innocent spouse tax relief.
- They will also be notified of the determination on your election and have the opportunity to appeal IRS's preliminary determination to grant you full or partial relief.
What are the rules for Innocent Spouse Relief?
To qualify for innocent spouse tax relief, you must meet all of the following conditions:
- You must have filed a joint return which has an understatement of tax
- The understatement of tax must be due to erroneous items of your spouse
- You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax
- Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax
- You must request IRS innocent spouse relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998
What are erroneous items?
- Erroneous items are any deductions, credits, or bases incorrectly stated on the return, and any income not reported on the return.
What is an understatement of tax?
- An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.
- For example, you reported total tax on your 1996 return of $2,500. IRS determined in an audit of your 1996 return that the total tax should be $3,000. You have a $500 understatement of tax.
Will I qualify for innocent spouse relief in any situation where there is an understatement of tax?
- No. There are many situations in which you may owe tax that is related to your spouse, but not be eligible for innocent spouse relief.
- For example, you and your spouse file a joint return that reports $10,000 of income and deductions, but you knew or had reason to know that your spouse was not reporting $5,000 of dividends.
- You are not eligible for innocent spouse relief when you have knowledge or reason to know of the understatement.
What are the rules for Separation of Liability?
- Under this type of relief, you divide (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse.
- The understatement of tax allocated to you is generally the amount of income and deductions attributable to your earnings and assets.
- You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief.
- Under this rule, you are no longer married if you are widowed.
- You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12 month period ending on the date you file for Innocent Spouse relief.
Why would a request for separate liability be denied?
Even if you meet the requirements listed above, a request for separate liability will not be granted in the following situations:
- The IRS proves that you and your spouse transferred assets for the main purpose of avoiding payment of tax.
- The IRS proves that at the time you signed your joint return, you had actual knowledge that any items giving rise to the deficiency and allocable to your spouse were incorrect.
If a husband and wife are still married but separated for 12 months, prior to filing a claim for relief due to an involuntary reason such as incarceration or military duty, can separation of liability relief be granted?
- Separation of liability applies to taxpayers who are (1) no longer married, (2) legally separated, or (3) living apart for the 12 months prior to the filing of a claim.
- Under this rule, you are no longer married if you are widowed.
- Living apart does not include a spouse who is temporarily absent from the household.
- A temporary absence exists if it is reasonable to assume that the absent spouse will return to the household, or a substantially equivalent household is maintained in anticipation of such a return.
- A temporary absence may include absence due to incarceration, illness, business, vacation, military service, or education.
- A claim can be filed if any of the three statutory requirements are met.
What are the rules for Equitable Relief?
Equitable relief is only available if you meet all of the following conditions:
- You do not qualify for innocent spouse relief or the separation of liability election.
- The IRS determines that it is unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances.
What Factors are considered in determining whether or not to grant equitable relief?
The following factors may be considered, but the list is not all-inclusive:
- Current marital status
- Abuse experienced during the marriage
- Reasonable belief of the requesting spouse, at the time he or she signed the return, that the tax was going to be paid; or in the case of an understatement, whether the requesting spouse had knowledge or reason to know of the understatement
- Current financial hardship/inability to pay basic living expenses
- Spouses' legal obligation to pay the tax liability pursuant to a divorce decree or agreement to pay the liability
- To whom the liability is attributable
- Significant benefit received by the requesting spouse
- Mental or physical health of the requesting spouse on the date the requesting spouse signed the return or at the time the requesting spouse requested the relief
- Compliance with income tax laws following the taxable year or years to which the request for relief relates
How do state community property laws affect my ability to qualify for relief?
- Community property states are Arizona , California , Idaho , Louisiana , Nevada , New Mexico , Texas , Washington , and Wisconsin . Generally, community property laws require you to allocate community income and expenses equally between both spouses.
- However, community property laws are not taken into account in determining whether an item belongs to you or your spouse (or former spouse) for purposes of requesting any relief from liability.
If I am denied innocent spouse relief, must I reapply if I believe I might qualify under one of the other two provisions?
- No. The IRS automatically will consider whether any of the other provisions would apply.
- If you requested equitable relief, but should have requested innocent spouse relief or separation of liability, you will be contacted by IRS to explain the process to be considered for innocent spouse relief or separation of liability.
- If you requested innocent spouse relief or separation of liability, IRS will automatically consider equitable relief
Will the IRS deny me relief if I do not provide them with the information they request?
- IRS will base their decision upon all the information available to them.
- If enough information is not available, it could adversely affect a request for relief.
I filed an Offer in Compromise, under doubt as to liability. The IRS accepted the Offer in Compromise. Can I still apply for innocent spouse relief?
- No. We cannot consider your claim for any year in which an Offer in Compromise was accepted.
- Acceptance of an Offer in Compromise conclusively closes the tax year(s) compromised from any re-determination of the tax liability.
I signed a Closing Agreement, can I still apply for innocent spouse relief?
It depends on the type of closing agreement you signed.
- If you signed Form 866, Agreement as to Final Determination of the Tax Liability, the tax year is closed with finality and you cannot apply for innocent spouse relief.
- If you signed Form 906, Closing Agreement on Final Determination Covering Specific Matters, only those matters covered in the closing agreement are conclusively closed. Innocent spouse relief may be requested for matters for covered in the closing agreement.
- If the closing agreement involved TEFRA issues refer to Treas. Reg. 1.6015-1(c) for exceptions to this rule.
What if the IRS has levied my account for the tax liability and I decide to request relief?
- Upon receipt of your request for relief all collection activity against you will be suspended unless the liability is in jeopardy or the statute of limitation on collection will expire shortly.
What constitutes a collection activity for purposes of starting the two-year statute of limitations?
The following are examples of collection activity-
- The IRS sends a notice under section 6330 of the Service's intent to levy and of the taxpayer's right to a collection due process (CDP) hearing
- The IRS offsets a refund from another tax year
- The IRS files a judicial suit or claim that puts the requesting spouse on notice the IRS intends to collect the joint tax liability from specific property belonging to that spouse.
I filed a valid joint return with my spouse and have an installment agreement to pay the taxes. Can I still apply for relief?
- The innocent spouse rules may apply in your situation.
- However, regarding the installment agreement, there are some important considerations;
- If you do not continue to make payments while we consider your request for relief, your installment agreement will default and full payment will be due immediately if your request for relief is denied.
What is injured spouse relief?
- Injured spouse relief is different from innocent spouse relief.
- When a joint return is filed and the refund is used to pay one spouse's past-due child and/or spousal support, a past-due federal debt, or past-due state income tax, the other spouse may be considered an injured spouse.
To be considered an injured spouse, you must have done all of the following-
- Filed a joint return
- Received income (such as wages, interest, etc.)
- Made tax payments (such as withholding or estimated tax payments)
- Reported the income and tax payments on the joint return an overpayment, all or part of which was applied to the past-due amount of the other spouse.
My spouse forged my signature to a joint return. Am I eligible for innocent spouse relief?
- You may be eligible for relief, but relief does not fall under the innocent spouse rules.
- If you can establish your signature was forged, and there was not tacit (implied) consent, the joint election is invalid and you will only be liable for your separate tax liability.
What is the meaning of "economic hardship" for purposes of equitable relief of an underpayment of tax liability shown on a tax return?
- "Economic hardship" means that you are unable to pay your basic living expenses, e.g. food, clothing, housing, utilities, medical expenses (including health insurance), transportation, child care, child support, etc..
Will I receive a refund of all amounts I paid, if relief is granted?
It depends upon the provision under which relief is granted.
- If innocent spouse relief is granted under section 6015(b), refunds are allowable for amounts paid on or after July 22, 1998.
- If separation of liability is granted under section 6015(c), no refunds are allowable.
- If equitable relief is granted under section 6015(f), refunds may be allowed depending on whether it is for an understatement or an underpayment case.
- The requesting spouse must establish that he or she provided the funds used to make the payment for which he or she seeks a refund.
Understatements - Refunds are allowed for installment agreement (if not defaulted) payments made after the request for relief is filed.
- Underpayments - Refunds are allowed for payments made after 7-22-98 unless the payments were made jointly with the non-requesting spouse, payments were made with the return or payments were made by the non-requesting spouse.
- All refunds are subject to Internal Revenue Code section 6511.
- This code section only allows refunds for payments made within 2 years after the tax was paid or 3 years after the return was filed whichever is later.
Will I be granted innocent relief with respect to unreported income if I feel it is my accountant's fault that the income was not reported on the return?
- Innocent spouse relief is in no way meant to transfer the claim to an accountant.
- If the income was yours (rather than your spouse's), or was your spouse's but you knew about it, you will probably not be relieved of liability.
If an understatement is the result of signing an examination report that lists omissions of income, does this indicate there was knowledge of items giving rise to the deficiency?
No, innocent spouse provisions clearly state the knowledge has to do with what was known at the time the return was signed.
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