Introduction To Innocent Spouse Relief
Recent changes to Innocent spouse
rules:
- The IRS will no longer apply the two-year limit to
new Innocent spouse equitable relief requests or requests currently being considered by the
agency.
- A taxpayer whose equitable relief request was previously
denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse
Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers
with cases currently in suspense will be automatically afforded the new rule and should not
reapply.
- The IRS will not apply the two-year limit in any pending litigation involving equitable
relief, and where litigation is final, the agency will suspend collection action under certain
circumstances.
Filing for Innocent spouse relief with the IRS is very complex. Even more so than anOffer in
Compromise. The criteria the IRS uses in deciding an
Innocent spouse case is based on the individual facts and circumstances. Anyone considering filing an Innocent
Spouse claim should hire legal representation. It is
not recommended that a person attempt to represent themself in an innocent spouse case. It really takes a third
party who has experience, does not have emotional involvement and is able to objectively argue the
case.
The first
thing that you should be aware of is that innocent spouse relief is only available to spouses when there is
an income tax liability. If your spouse owes payroll or
any other type of tax, innocent spouse relief will not be an option.
Normally when married persons file a joint tax
return they are both liable for any tax owing relating to that return.This is true even if they were to later get
divorced and their divorce decree states that a former spouse will be responsible for any amounts due on previously
filed joint returns. The IRS does not recognize these types of agreements in divorces. Under the joint filing
status, the IRS can collect entire tax liability from one spouse even if all the income was earned by the other
spouse.
Under IRS
innocent spouse relief, a spouse can be relieved of the tax, interest, and penalties on a joint tax return.
There are 3 types of relief are available.
-
Innocent spouse
relief.
-
Separation of
liabilityRelief
and
-
Equitable
relief.
Each type of
relief has different requirements. The IRS table below compares the rules for these three types of
relief.
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Three Types of Relief at
a Glance
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Factors
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Innocent Spouse Relief
§6015(b)
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Allocation of Liability
§6015(c)
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Equitable Relief
§6015(f)
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Equitable Relief Community Property
States
§66(c)
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Type of Returns
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Joint
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Joint
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Joint
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Married filing separate
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Type of Liability
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Deficiency
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Deficiency
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Deficiency or underpayment
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Deficiency or underpayment
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Special Requirements
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Relief under § 6015(b) and §6015(c) not
available
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Refunds Subject to Internal Revenue
Code 6511
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Refunds available
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No refunds
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Refunds available for:
Underpayment
- if payments are made solely by the RS.
Deficiency
- payments made solely by the RS after claim filed and
pursuant to installment agreement (not
defaulted).
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Marital Status
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Marital status considered as an equitable
factor
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Must be divorced, widowed; legally separated; OR not living
together for at least 12 months prior to the
election
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Marital status considered as an equitable
factor
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Knowledge
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TP must establish
had
no knowledge OR reason to know
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IRS must establish TP
hadactual
knowledge of
deficiency items
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Knowledge considered as an equitable
factor
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Equity
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Inequitable to hold TP liable: consider all facts &
circumstances
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Inequitable to hold TP liable: consider all facts &
circumstances
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Required Factors Tier I
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Tier I Cases (Relief ordinarily granted if all 4 factors
met)
1.
Underpayment
2.
No longer married, legally separated, OR living together
for 12 months prior to request
3.
No knowledge or reason to know when return
signed
4.
TP will suffer economic hardship if relief not
granted
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List of Partial Factors Tier II
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Tier II Cases - Underpayment and
Deficiency
Equitable Relief Factors
1.
Marital status (same as 6015(c))
2.
Economic Hardship (defined in Regs.
§301.6343-1(b)(4))
3.
Non requesting spouse's legal requirment to pay the
liability
4.
No knowledge or reason to know (that liability would not be
paid (for underpayment) or of item (for
deficiency)
5.
Significant Benefit
6.
Compliance with Income Tax Laws
7.
Abuse (but not duress)
8.
Mental or physical health
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Fraud
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Fraud is a consideration in equity
determination
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Election invalid if IRS shows TP transferred assets as part
of a fraudulent scheme
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Relief not available if
1.
Fraudulent return or
2.
Assets transferred as part of fraudulent
scheme
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Disqualified Assets Transferred for Avoidance of Tax or
Payment of Tax
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Transfer of disqualified assts is a consideration in equity
determination
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Amount of allocation is increased by value of disqualified
assets
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Relief not available to extent of value of any disqualified
assets
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Consideration in Courts
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Tax Court; if full-paid, District court or Court of Federal
Claims
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Tax Court
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Tax Court review of IRS's possible abuse of
discretion
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Tax Court review if part of deficiency proceedings or under
Collection Due Process proceedings
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Innocent Spouse
Relief
As shown by
the IRS table, the first type of relief is simply called innocent spouse relief. By requesting innocent
spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse
or former spouse improperly reported items or omitted items on your tax return. Generally, the tax, interest,
and penalties that qualify for relief can only be collected from your spouse or former spouse. However, you
can still be held liable for any tax, interest, and penalties that do not qualify for relief. The IRS can
collect these amounts from either you or your spouse or former spouse.
You must meet
all of the following conditions to qualify for innocent spouse relief.
1.
Understatement- You
filed a joint return with your spouse, which has an understatement of tax due to erroneous items of your
spouse or former spouse. Erroneous items would be unreported income, improper deductions, credits or property
basis.
2.
Knowledge - You are
able to show 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. For any understatement of tax that you knew of or had reason to know of,
you will be held jointly liable for that portion.
The IRS will
consider all facts and circumstances in deciding whether you had reason to know of an understatement of tax
due. The facts and circumstances include:
- The type of the erroneous item and the size
of the erroneous item relative to other items.
- The financial situation of you and your
spouse or former spouse.
- Your educational background and business
experience.
- How much you took part in the activity that
resulted in the erroneous item.
- Whether you failed to ask, 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.
- Whether the erroneous item represented a
departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an
investment regularly reported on prior years' returns).
You can still
qualify for partial relief if, when you filed your return, you did not know or had no reason to know of only
a portion of an erroneous item. You will be relieved of the understatement due to that portion of the item if
all other innocent spouse requirements are met for that portion.
3.
Fairness - Taking
into account all the facts and circumstances it would be unfair to hold you liable for the tax. In
determining fairness, the IRS will consider:
a. Whether you
received a significant benefit either directly or indirectly, from the understatement.
b. Whether
your spouse or former spouse deserted you.
c. Whether you
and your spouse have been divorced or separated.
d. Whether you
received a benefit on the return from the understatement.
4.
Fraud - A request
for innocent spouse relief will not be granted if the IRS proves that you and your spouse or former spouse
transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to
defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
Separation of liability relief
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