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“Innocent Spouses” – IRS Introduces New Guidelines for Tax Relief | New Rules Innocent Spouse | Innocent Spouse Relief August 12, 2012

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There are multiple sections under which taxpayers may seek to eliminate tax liabilities attributable to their spouses or former spouses.  However, for many taxpayers, seeking “equitable relief” under IRC § 6015(f) becomes their only option due to the stricter time limitations of other sections.

In determining whether to grant equitable relief under this section, the IRS considers each individual’s facts and circumstances and then determines whether it would be inequitable to hold the requesting taxpayer liable for the tax deficiency.

Taxpayers seeking relief pursuant to this section now are likely to see major benefits under proposed revisions to the Internal Revenue Service procedures used to grant and deny these requests.

New Threshold Requirements

A requesting taxpayer must meet some threshold requirements to receive relief under this section.  Specifically, the taxpayer must demonstrate each of the following facts:

(1) The taxpayer filed a joint return for the tax year at issue;

(2) The taxpayer is ineligible to seek innocent spouse relief under § 6015(b) or 6015(c);

(3) The taxpayer has timely filed a claim for relief;

(4) The taxpayer has not transferred assets with his/her spouse pursuant to a fraudulent scheme;

(5) The taxpayer did not receive “disqualified assets” from his/her spouse;

(6) The taxpayer did not knowingly participate in filing a fraudulent return with the IRS; and

(7) The taxpayer seeks relief from liability that arose from a tax attributable to an understatement or underpayment of the spouse’s income.

New “Streamlined” Determinations after Initial Administrative Review

Under the newly released guidelines, Taxpayers seeking relief may be granted a streamlined determination in their favor if they meet the threshold requirements above and all of the following circumstances are met:

(1) The taxpayer is no longer married to the other spouse;

(2) The taxpayer would suffer economic hardship if relief was not granted; and

(3) The taxpayer either did not know or have reason to know that his/her former spouse made an understatement on their joint tax return or would not or could not pay any tax deficiencies, OR the taxpayer was unable to challenge his/her former spouse due to abuse or financial control of the former spouse.

Clarification of Equitable Factors 

For taxpayers who do not meet the requirements to be granted a streamlined decision in their favor, the IRS will evaluate requests based on a number of equitable factors.  Several factors will continue to be considered, including: marital status of the taxpayer, economic hardship faced by the taxpayer if relief isn’t granted, the taxpayer’s knowledge of an underpayment or understatement, any legal obligations of the taxpayer or other spouse to repay the deficiency, any significant benefits the taxpayer received from the deficiency, and the taxpayer’s compliance with income tax laws.  Specific considerations revised or clarified by the new revenue procedures include:

  • WEIGHING OF FACTORS: Any number of additional factors may be considered, and no single factor a combination of factors alone may control the determination.  The IRS may grant relief even when several factors weigh against relief, or, conversely deny relief even when several factors weigh in favor of relief.
  • KNOWLEDGE & ABUSE:  Knowledge of an understatement or underpayment will not weigh more heavily than any other factor.  Additionally, in cases involving abuse or financial control, this factor may weigh in favor of relief despite a taxpayer’s knowledge of an understatement or underpayment.
  • USE OF FACTORS: The “marital status” and “economic hardship” factors can only help eligible taxpayers and not harm other taxpayers.  The factors will weigh in favor of      relief for divorced/separated taxpayers and taxpayers facing economic hardship but will remain neutral for other taxpayers.  Other factors, including “compliance with income tax laws” may continue to be used to help or hurt a taxpayer’s case.

The new guidelines above are among the many proposed revisions introduced by the IRS this year and will be in place until the IRS publishes final new regulations on the subject.

Taxpayers interested in pursuing a request for innocent spouse relief under § 6015(f) should discuss the effect of these changes on their arguments with a local tax attorney.

Free Consultation with Tax Attorneys in Bellevue, Burien, Everett, and Seattle

Washington taxpayers may schedule a free consultation to discuss their options with Insight Law by calling (206) 397-4780 or visit our website link below to speak with a tax attorney.

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Innocent Spouse Relief | Do I Qualify? | Insight Law Firm May 13, 2012

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Can I be heldresponsible for tax debts my spouse incurs? 

Yes.  When spouses file joint tax returns, each spouse is generally joint and severally liable for any tax due that year, including the full amount of taxes due, penalties, and interest.  This means that the IRS may pursue the whole amount due from both spouses or any one of the spouses individually, and your liability can survive divorce.  However, there are forms of relief available.

What if the tax debt is from my spouse or ex-spouse not properly reporting income, deductions, etc.?

Under some circumstances, the IRS may grant “innocent spouse relief” to a spouse or ex-spouse facing liabilities that arose by the other partner failing to report income or taking improper deductions or credits.  IRC § 6015(b).  A party seeking relief as an innocent spouse must demonstrate that:

(1) He/she filed a joint return that understated taxes due to erroneous items reported by your spouse or ex-spouse;

(2) He/she did not know and had no reason to know that there was an understatement of tax when the joint return was signed;

(3) It would be unfair to hold him/her responsible for the understatement of the tax given the totality of the facts and circumstances; and

(4) He/she did not transfer property with the spouse as part of a scheme to defraud the IRS and/or another third party.

What if we later separate or divorce?

Tax liabilities you incur while married will survive your separation or divorce.  However, if you and your partner later separate, you may petition the IRS to separate your liabilities under IRC § 6015(c).  This permits you to abandon your earlier “joint” filing status, distinguish your tax debts from your former partner’s debts, and request the IRS to separate your liabilities accordingly.  A taxpayer can qualify for this “separation of liability relief” only if he/she is divorced, legally separated, or widowed, or if he/she is no longer a member of the same household as the former spouse.

Are there other options if I don’t qualify for relief under IRC  § 6015(b) and IRC  § 6015(c)?

Both of the forms of relief described above have time limitations and other restrictions that not every taxpayer may qualify for.  Taxpayers who do not qualify for relief under 6015(b) or 6015(c) may still seek  “equitable relief” under IRC § 6015(f).  Under this section, the IRS evaluates the individual facts and circumstances of each case and determine whether it is inequitable to hold a spouse liable for an unpaid tax liability.  Factors the IRS will consider in determining whether to grant equitable relief include:

  • whether you have separated from your spouse,
  • whether any divorce decree or separation agreement makes you liable for the debt,
  • whether you benefitted from the understated or underpaid tax,
  • whether you would suffer a significant economic hardship if you were not granted relief,
  • whether you made good faith efforts to comply with tax laws, and
  • whether you knew or had reason to know the tax not be paid.

If you would like to discuss whether innocent spouse relief, separation of liability relief, or equitable relief may help you with a Washington tax attorney, call Insight Law for a free consultation at (206) 397-4780, or click the Tax Lawyer link below to visit our website.

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