Approximately 95.5% of married couples file joint returns each year. The primary advantage of doing so is the reduction in their combined tax burden. The primary disadvantage is that the couple shares “joint and several liability” for unpaid taxes.
What is Joint and Several Liability?
By sharing joint and several liability, each spouse is SEPARATELY responsible for the couple’s ENTIRE shared tax liability. Liability can be collected only once. IRS is not a party to an interspousal agreement, and is not bound by such terms; however, IRS can collect from the spouse whose assets and/or income are the easier to reach.
In response to this, IRS defined its earliest innocent spouse rule in 1971. The current rule applies to any liabilities left unpaid as of July 22, 1998.
Getting Innocent Spouse Status
There are three ways a spouse can obtain innocent spouse status with the IRS under IRC §6015:
To distinguish underpayment from understatement, remember: underpayment means a couple’s tax liability as shown on their joint return has not been fully paid; understatement means a couple’s joint return does not show their entire liability (i.e., there is an unpaid deficiency).
Eligibility and Relief under §6015(c)
To be eligible for innocent spouse status under §6015(c), a taxpayer must no longer be married due to divorce, court-decreed separation or death OR the taxpayer must not be a member of the same household as his or her spouse during the 12-month period prior to filing the Request. In either case, the taxpayer requesting innocent spouse status must have no actual knowledge of the facts creating a deficiency unless he or she signed the return under duress.
Seeking relief under 6015(c) means determining each spouse’s deficiency as if they filed separate returns. The deficiency allocated to a spouse is then increased by the amount of tax-avoidance transfers.
NOTE: Deficiency related to a child’s income is allocated jointly to both parents, but not to a step-parent.
Eligibility and Relief under §6015(b)
To be eligible for innocent spouse status under §6015(b), a taxpayer must be able to show that he or she did not know and had no reason to know of facts creating all or part of the understatement. In addition, it must be inequitable to hold the requesting spouse liable. It is important to consider all the facts and circumstances to determine inequitabilility, including:
Eligibility and Relief under §6015(f)
To be eligible for innocent spouse status under §6015(f) a taxpayer must first show that he or she does not qualify under §6015(b) or §6015(c). Second, the taxpayer must indicate there was no fraudulent intent regarding the return or interspousal transfers. Third, he or she must indicate how liability is attributable to the other spouse unless there has been a misappropriation of funds or he or she is a victim of abuse. Finally, it is inequitable to hold the requesting spouse liable for similar reasons as under §6015(b) when there is actual or constructive knowledge of an additional factor, rather than a bar.
NOTE: IRS will always consider §6015(f) relief in the case of a claim under §6015(b) or §6015(c).
Claiming Innocent Spouse Status
To claim innocent spouse status, a taxpayer must file Form 8857, or a similar written request, within two years of the earliest targeted collection activity (not applicable for §6015(f)). To clarify this timeline, at least three Tax Court cases have held that the two-year period runs only after IRS provides notice of the right to claim innocent spouse status (McGee, 123 TC 314; Nelson, TC Memo 2005-9; Ferris, TC Summ. Op. 2005-131).
NOTE: While a notice of deficiency (notice of federal tax lien or demand for payment of tax) is NOT considered collection activity, notice of right to CDP appeal, retention of overpayment, litigation by the Government or filing of proof of claim IS considered collection activity.
According to IRS Notice 2012-8, a claim for relief under §6015(f) can be filed at any time before the expiration of the statute of limitations on collection. This is a big change from the previous position of IRS that such claims needed to be filed no later than two years from the date of earliest collection activity.
Collection Action during Pendency and Bars to Relief
IRS is prohibited from collection activities against a taxpayer requesting innocent spouse status during pendency of §6015(b) or §6015(c) claim. However, a bond is required if an adverse Tax Court decision is appealed. As a policy matter, IRS will normally cease collection activities during pendency of §6015(f) claim unless collection is somehow jeopardized or the expiration of the statute of limitations is approaching. It is important to remember that the statute of limitations is suspended during pendency of claim, plus 60 days.
Bars to relief include administrative bars (closing agreement or offer in compromise), previous adjudication and previous administrative determination, with the exception of premature filing under §6015(c)
Rights of the Nonrequesting Spouse
IRS must send notice to the nonrequesting spouse giving him or her an opportunity to submit information relevant to the request. However, failure to submit such information does not bar the nonrequesting spouse’s own claim. IRS must also notify the nonrequesting spouse of its preliminary and final determinations, and administrative appeal rights remain if innocent spouse status is granted (except under §6015(f)).
Preliminary and Final Determination
Following IRS’s preliminary determination, the requesting spouse has administrative appeal rights if his or her request for innocent spouse status is denied. The appealing spouse then has a right to a conference.
Following the final determination, the requesting spouse can petition the Tax Court after denial of relief (only if aggregate amount in dispute is less than $50,000). The majority of courts agree that the Tax Court has jurisdiction to hear appeals from adverse §6015(f) decisions. P.L. 109-32 clarified that the Tax court can review “stand-alone” petitions, but the petitioner must establish that denial of relief was abuse of discretion.
For the nonrequesting spouse, seeking Tax Court review of grant of relief to the requesting spouse is not permitted. Instead, the nonrequesting spouse can intervene in support of, or in opposition to, a petition of the requesting spouse.
Other Laws and Chief Counsel Advice 20080230
Innocent spouse relief is overridden by transferee liability laws. In addition, joint property with the nonrequesting spouse is not protected by innocent spouse relief.
Chief Counsel Advice 20080230 stated that granting innocent spouse status does not abate, but limits collection activity. Also, reversal of a grant due to fraud does not necessitate a new assessment subject to statute of limitations issues.
More on Representing the Troubled Taxpayer