Recent court cases have shown how it is very difficult for taxpayers to prevail in courts when they seek innocent spouse relief.
Marriage carries with it many tax consequences that could be minimized through careful tax planning strategies. Marriage planning should include discussion about taxes. The subject of taxes is even more important if you plan to execute a prenuptial or premarital agreement.
Are you an innocent spouse?
Married taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise because of a joint return, even if they later divorce. Each taxpayer is legally responsible for the entire liability. One spouse could be legally held liable for all the tax due, even if the other spouse earned all the income or claimed improper deductions or credits.
Could an innocent spouse be relieved from a tax liability on a joint tax return?
There are three types of relief from joint and several liability that are available to married taxpayers who filed joint returns: 1) Innocent spouse relief (not the same as injured spouse relief), 2) Separation of liability relief, and 3) Equitable relief.
1. Innocent Spouse relief. Under innocent spouse relief, a taxpayer will use Form 8857 to request the relief, if all the conditions below are met:
1.1. The spouses must have filed a joint return with an understatement of tax directly related to the spouse’s erroneous items.
1.2. The taxpayer seeking relief can establish that at the time he or she signed the joint return, he or she did not know and had no reason to know, that there was an understatement of tax.
1.3. The taxpayer and the spouse or former spouse have not transferred property to one another as part of a fraudulent scheme.
1.4. Considering all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax.
2. Separation of liability relief could be claimed by taxpayers who are no longer married, widowed, or legally separated and have not been members of the same household for a 12-month period. The tax, plus interest and penalties, that is understated on the joint return is allocated between spouses or former spouse. Generally, the tax allocated is the amount the taxpayer is responsible to pay. This relief is available only for unpaid liabilities resulting from the understated tax. Refund is not allowed.
3. Equitable relief is for a properly stated but underpaid tax. When a taxpayer is not qualified for other forms of relief, he or she may still be relieved of responsibility for tax, interest, and penalties.
Tax court cases have constantly shown that the probability of success is very low in a claim for relief from joint and several liability, unless the petitioner has acted as a reasonably prudent person.
In Vikki L. Rogers, petitioner, and Brian D. Rogers, intervenor v. Commissioner of the Internal Revenue Service (T.C. Memo. 2021-20), the tax Court ruled that petitioner is not entitled to relief from joint and several liability under section 6015(b), (c), or (f) of the code for the tax years at issue because in applying the reasonable prudent person standard the court found that former spouse, petitioner, knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her Federal income tax return filing obligations.
Petitioner and former husband jointly owned one business. Petitioner solely owned 2 businesses. The facts show that petitioner was very involved in making major decisions for the joint business. In fact, she managed the business. After audit by the IRS, she filed for innocent spouse relief, Her claim was denied by the IRS. She claimed that she had no knowledge when the joint return Form 1040 was filed. She also claimed that she was a victim of domestic abuse. However, there is no evidence of a police report and she never sought help from a local domestic violence program.
The Court applies a reasonably prudent person standard to evaluate the requesting spouse’s knowledge in cases involving both erroneous deductions and unreported income. In applying the reasonably prudent person standard, the court considers four factors:
(1) the spouse’s level of education,
(2) his or her involvement in the financial and business activities of the family,
(3) the presence of unusual or lavish expenses beyond the family’s norm, and
(4) the non-requesting spouse’s evasiveness or deceitfulness about the family’s finances.
After weighing all the facts and circumstances, the court is not persuaded that petitioner is entitled to relief under section 6015(f).
Further reading:
Vikki L. Rogers, petitioner, and Brian D. Rogers, intervenor v. Commissioner of the Internal Revenue Service (T.C. Memo. 2021-20). IRS Publication 971, IRC section 6015. Resser v. Commissioner, 74 F.3d at 1536. Rogers v. Commissioner, T.C. Memo. 2018-53, at 103
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