Tax Relief

Harmless spouses’ relief declared: tax relief for spouses | Freeman legislation

A subject that we often see in the tax clinic I run and that is often misunderstood is the relief of innocent spouses.

In general, the purpose of exonerating innocent spouses is, as one court put it, “to protect one spouse from the transgression or dishonesty of the other”. Purcell v Commissioner, 826 F.2d 470 (6th Cir. 1987). However, many people who come to the clinic believe that when the other spouse has earned the income, they are automatically entitled to relief for innocent spouses if the appropriate amount of tax is not paid. And that’s just not the case.

As I always do with my students, the starting point is the Internal Revenue Code, and the main section we look at regarding exonerating innocent spouses is this Section 6015 – “Exemption from joint and several liability in the event of joint return.” So Section 6015 begins with the introduction of “Notwithstanding Section 6013 (d) (3)”, so we start our analysis there:

Section 6013 generally deals with the return of a husband and wife together. Section 6013 (d) provides that “for the purposes of this section” (that is, the section relating to joint declarations) and then (d) (3) says that “if a joint declaration is made, the tax On the total income and tax liability are joint and several. ”For those unfamiliar with the concept of joint and several liability, it often appears in the context of tort litigation and simply means the IRS can investigate either Spouse for the Total amount the tax – regardless of: (1) who made the money; (2) Who was responsible for the finances; or (3) Who was responsible for preparing and submitting the declarations.

Now we jump back to §6015 and see that §6015 shows us a rule that applies regardless of the general rule that both spouses are jointly and severally liable for the entire tax amount. §6015 (a) directs us to two avenues for relief under §6015 – one described in §6015 (b) and another described in §6015 (c). We will see that there is a third way described in §6015 (f).

Relief according to §6015 (b)

So we start with the relief under Section 6015 (b), which provides in Section 6015 (b) (1) that if a taxpayer meets five (5) separate requirements, a spouse can be exempt from liability to the extent that the section applies. These requirements are as follows:

  • Requirement # 1: (A) requires that a joint declaration has been prepared for the tax year.
    • That’s pretty easy to satisfy in general.
  • Requirement No. 2: (B) stipulates that “such a declaration has too low a tax declaration due to incorrect elements of a person submitting the joint declaration”
    • So here we have a few requirements:
      • At first there has to be an understatement;
      • Second, this understatement must be due to incorrect information provided by one of the returners.
    • As you can probably imagine, the factual scenarios under section 6015 are ubiquitous, but generally speaking, the tax items for which relief is sought must relate to the non-applying spouse.
  • Requirement # 3: (C) states that the “other person” filing the joint statement states that they did not know and had no reason to know that there was such an understatement when they signed the statement.
    • For starters, the “other person” is the spouse seeking relief.
    • Next, the taxpayer has to prove that he or she “didn’t know”. This is the requirement that is often the most difficult to determine;
      • In interpreting cases for this element, a spouse seeking an exemption has been found to know of an under-tax if he or she has knowledge of, or reason to, the transaction that gave rise to the under-tax. Guth versus Commissioner, 897 F.2d 441 (9th Cir. 1990); Cheshire v Commissioner, 282 F.3d 326 (5th Cir., 2002)
      • The following knowledge of the transaction was found:
        • Knowledge of working for a specific company. Becherer, 88 TCM 617 (TC, 2004)
      • For example, if a wife knows that her husband owns company stock but does not know that a dividend has been paid, then the wife’s knowledge of her husband’s stock ownership does not correspond to actual knowledge of receiving the dividend. Comes from Reg. Section 1.6015-3 (c) (2) (iii)
      • Facts and circumstances considered include (see Treas. Reg. 1.6015-2 (c)):
        • The nature of the faulty item;
        • The couple’s financial situation;
        • The educational background and business experience of the requesting spouse
        • The extent to which the requesting spouse was involved in the activity that resulted in the incorrect item
        • Whether the requesting spouse, when or before signing the return, did not inquire about items in the return or omitted the return that a reasonable person would question; a dn
        • Is the faulty item a deviation from a recurring pattern that is reflected in the returns from previous years?
  • Requirement # 4: (D) states that, taking all facts and circumstances into account, it is unreasonable to hold the other person liable for the lack of tax on this TY resulting from such understatement;
    • What are these facts and circumstances? Well, cases have looked (and Treas. Reg. 1.6015-2 (d) states:
      • (1) Whether the spouse applying for the exemption has received a substantial benefit; and
        • Evidence of a direct or indirect benefit may consist of the transfer of ownership or property rights;
      • (2) Whether the failure to state the correct tax liability in the joint declaration is due to concealment, excess or other misconduct on the part of the other spouse.
      • (3) whether the requesting spouse has been abandoned by the non-requesting spouse;
      • (4) divorce or separation from spouses;
        • Here I want to point out that we see in 6015 (f) an independent basis for obtaining equitable relief, but here we see that at least some of these requirements in relation to this path must be met for relief under 6015 (b) ( 2); and finally
  • Requirement # 5: (E) provides that the individual choose the benefits of this subsection, but no later than the date stipulated 2 years after the date the IRS began collecting activities in relation to the person making the election.

Relief according to §6015 (c)

As mentioned above, there is a second way of obtaining relief under §6015 in §6015 (c), which provides that an eligible taxpayer can limit his liability to that part of a defect that is properly attributable to the other taxpayer under section § 6015 (d). This type of exemption enables an applicant spouse who is widowed to limit the tax liability to the amount of the deficiency that can only be attributed to him or her. A requesting spouse can continue to be held liable for defects that are not attributable to him if he actually had knowledge of the defective item that caused the defect. The actual level of knowledge is determined in this context in the same way as when applying for regular discharge.

An exception to the factual denial is cases where domestic abuse prevented the spouse from challenging the wrong subject for fear of retaliation.

6015 (c) allows the requesting spouse (the one seeking discharge) to basically go back and pretend he or she is filing a separate statement.

Relief according to §6015 (f)

So, finally, we turn to the third and final path for relief under §6015, which can be found in §6015 (f). Section 6015 (f) provides a savings provision whereby if the IRS determines that in all facts and circumstances it is simply unfair to hold a spouse liable regardless of failure of (b) or (c) by the person who the IRS can relieve this person of liability.

§6015 (f) equity relief is only available if a spouse is not receiving regular or separate return relief. In the event that the tax has not been paid, such relief according to 6015 (f) must be requested before the expiry of the applicable limitation period according to §6502, which is usually 10 years after the assessment (6015 (f) (2) ( A)). If the tax has already been paid, the relief must be requested during the period in which the person could submit a timely request for a refund, which is determined according to § 6511 a) as the later date: (1) 3 years from the date the Submit return; or (2) years from the date of tax payment.

A spouse may receive fair discharge under Section 6015 (f) if the facts and circumstances make it unreasonable to hold them liable for underpayment or deficiency. Factors used in this determination were recorded in an IRS revenue process. Rev. Proc. 2013-34 provides a non-exclusive list of factors to consider when deciding whether or not to grant discharge, including:

  • marital status
  • Economic difficulties
  • Knowledge or reason to know
  • Legal obligation
  • Considerable advantage
  • Compliance with income tax law
  • Mental or physical health

Making a claim on an innocent spouse

So if we find that we are entitled to relief for innocent spouses, how can we make such a claim? Form 8857 is the appropriate form, and the instructions generally guide you through filling it out. The section goes through a series of questions designed to determine the conditions under which the taxpayer applies for relief, as described above. The questions are tailored to provide information specific to each type of assistance. If you need additional help, you can turn to IRS Publication 971 which details the full procedure for applying for relief for innocent spouses.

While exemptions from innocent spouses may not be as straightforward as many believe, there are several discharge options to address situations where it is considered unfair to hold a spouse liable for a couple’s full tax liability.

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