IRS Innocent Spouse Requests
Relief from Joint Income Tax Liability: Then and Now
Deborah J. Weber
Although we have grown up with joint returns and joint and several liability, our current tax system existed for five years without joint returns (introduced in 1918) and for another twenty years without joint and several liability (enacted by Congress in 1938). The Internal Revenue Service began pushing for joint and several liability in the early 1920’s based on “administrative necessity” but this argument was rejected by the Ninth Circuit in 1935 as unjustifiably denying each taxpayer the right to be taxed only in proportion to his or her own income. Moreover, although joint and several liability is often argued as the price paid for the privilege of filing a joint return, this was not a factor weighed by Congress when it enacted joint and several liability in 1938. In fact, the favorable rates for joint filers that are derived from income splitting were not enacted until 1948, ten years after the enactment of joint and several liability.
IRC §6013(e) was added to the Internal Revenue Code in 1971 by Congress who was apparently attempting to resolve the unfairness of joint and several liability in cases where one spouse omitted illegal activity income from a return, and where the other spouse was not aware of either the illegal activity nor the fact that such income had been omitted from the return. The then innocent spouse rules required a showing that the substantial understatement resulted from “grossly erroneous items” which were, until the mid-1980’s, limited to omitted items of income. The definition of “grossly erroneous items” was expanded in 1984 to include disallowed deductions, credits, or basis, but this relief was limited to only those deductions, credits, or basis which had “no basis in fact or law”.
Then, in July of 1998, Congress passed the IRS Restructuring and Reform Act of 1998. Section 3201 of the Act repealed Internal Revenue Code §6013(e) and added a new Code §6015. This Section liberalized the relief previously available under the old “innocent spouse” statute, extended relief to underpayment cases based on principals of equity and added a new apportionment of liability for taxpayers who are no longer married, are legally separated or living apart for more than 12 months. IRC §6015 also changed the procedural posture of innocent spouse claims by making relief from joint liability an election available at the collection stage as well as in pre-assessment litigation.
Under IRC 6015(b) and IRC 6015(c) respectively, an individual may elect the benefits of innocent spouse relief or separation of liability. If the individual elects only (b) or (c), and relief is denied under the subsection specified, the other subsection will be considered even though not specifically elected. When relief is denied under subsections (b) and (c), equitable relief under subsection (f) will be considered even if it was not specified by the requesting spouse (RS).
Innocent Spouse; Section 6015(B)
To establish entitlement to innocent spouse relief pursuant to IRC §6015(b), the taxpayer must establish the following:
- That a joint return was filed,
- That the return contained an understatement attributable to erroneous item of the non-requesting spouse,
- That he or she did not know or have reason to know of the understatement,
- That it would be inequitable to hold the requesting spouse liable.
Apportioned Relief; Section 6015(C)
IRC §6015(c) provides for an election that enables an individual to limit his/her liability to that portion of a joint deficiency that is attributable to items allocable to that individual. Items of income are allocated to the respective individuals who earned the income. For deductions or credits, the amount of the deficiency allocated is limited to the amount of income or tax allocated to such spouse that was offset by the deduction or credit.
A taxpayer is eligible to make this election if one of the following applies:
- The taxpayer is no longer married to the spouse with whom the joint return was filed. (This includes a widow/widower.)
- The taxpayer is legally separated from the spouse with whom the joint return was filed.
- The taxpayer and the spouse with whom the joint return was filed have lived apart for more than 12 months.
The burden of proof with respect to the appropriate allocation is on the taxpayer. Additionally the election is not available if the Secretary can establish that the assets were transferred between the joint filers as part of a fraudulent scheme, or that the taxpayer had actual knowledge of the understatement (unless the return was filed under duress).
Equitable Relief; Section 6015(F)
IRC § 6015 (f) was added to the Code to provide “equitable” relief to taxpayers who filed joint returns that fully reported the tax due but for which the no requesting spouses failed to make payments. However, the IRS will also consider equitable relief in an understatement case when it is determined relief cannot be granted under §6015(b) or (c).
On December 8, 1998 the Internal Revenue Service issued Notice 98-61 which provided interim guidance in relation to IRC §6015 (f) for taxpayers seeking equitable relief from an unpaid Federal tax liability arising from a joint return. On January 31, 2000 the Service issued Revenue Procedure 2000-15, effective January 18, 2000, which modified, and as modified, superseded Notice 98-61. Finally, the Service issued Rev. Proc 2003-61, which superseded Notice 2000-15 effective for all requests submitted after November 1, 2003.
- The individual seeking relief made a joint return for the taxable year for which relief is sought.
- Relief is not available to the individual requesting relief under §6015(b) or 6015(c).
- The individual applies for relief no later than two years after the date of the Service’s first collection activity after July 22, 1998, with respect to the individual.
- Attributable to the NRS — Equitable relief will not be considered if the liability is attributable to the RS unless one of the following exceptions applies:
- No assets were transferred between the individuals filing the joint return as part of a fraudulent scheme by such individuals.
- There are no disqualified assets transferred to the individual by the non-requesting spouse. The term “disqualified assets” has the meaning given such term by IRC §6015 (c)(4)(B) which defines the term disqualified asset as “any property or right to property transferred to an individual making the election under this section with respect to which a joint return by the other individual filing such joint return if the principle purpose of the transfer was the avoidance of tax or payment of tax”.
- The individual seeking relief did not file the joint return with fraudulent intent.
Relief will Ordinarily be Granted
If all the threshold conditions are met in underpayment cases, and the RS meets all of the following conditions, relief will ordinarily be granted:
- The spouse is divorced, legally separated, or living apart for the 12 month period prior to the date the request was filed;
- The RS had a reasonable belief at the time the return was signed that the tax was to be paid; and
- Economic hardship will result if relief is not granted.
Belief That Tax was to be Paid
The RS must prove he or she had a reasonable belief, at the time the return was signed, that the tax was going to be paid. A belief the tax would be paid is not reasonable if the RS knew or had reason to know the NRS was not in an economic position, and was not expected to be in an economic position within the foreseeable future, to pay those taxes. A similar position is taken where the RS knew the NRS had a history of not paying the IRS or other creditors.
Economic hardship is present where the RS is unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount of basic living expenses will vary according to the circumstances of the individual taxpayer but do not include the maintenance of an affluent or luxurious standard of living.
In order for a taxpayer to obtain relief pursuant to IRC §6015 (b) or (c), he/she must make the election seeking relief on a Form 8857 not later than 2 years after the date the Secretary has begun collection activities with respect to the individual making the election. The Tax Court recently held, however, that the 2 year rule does not apply to requests made pursuant to IRC Section 6015(f) ( Kathy Marie Lantz v. Commissioner of Internal Revenue, 2009 US Tax Court, Lexis 8; 132 TC 8 (April 7, 2009).
The following actions by the Service constitute collection activity:
- Refund offsets: The offset of an overpayment of the RS against the joint liability under IRC § 6402 constitutes collection activity.
- Section 6330 notices, Final Notice of Intent to Levy:
- The filing of a suit by the United States against the RS
- Claims in judicial proceedings:
“Collection activity” does not include the following IRS actions:
- Notices of deficiency;
- Demands for payment of tax; and
- Notices of Federal Tax Lien;
Final Determination Letters
If the RS’s request for relief is denied, a final determination letter will be issued by the Internal Revenue Service. Thereafter, the RS has 90 days from the date the Service issues a final determination letter, to petition the United States Tax Court. The recent case of Pollock v. Commissioner decided by the Tax Court in just February of this year confirms the 90 day limit is jurisdictional and not similar to a statute of limitations potentially subject to equitable tolling.
Statute of Limitations
Under IRC 6015(e)(2) , the collection statute (CSED) is suspended for the period for which the Service is prohibited from taking certain collection actions (see IRM 184.108.40.206.5), plus an additional 60 days. Generally, under current law, the Service is prohibited from collection and the CSED is suspended from the filing of the claim for relief ( Form 8857) until the earlier of a waiver is filed ( Form 870–IS); until the expiration of the 90-day period for filing a Tax Court petition, or if a Tax Court petition is filed, until the Tax Court decision becomes final.
IRC 6015(e) was amended by the Tax Relief and Health Care Act of 2006 on December 20, 2006, so that most claims for relief made solely under IRC 6015(f) result in a prohibition on collection and a suspension of the CSED. As a result, the Service revised Form 8857 as of June 2007 to no longer ask a RS to specifically request under which subsections of section 6015 the RS is seeking relief. Instead, the Service will consider relief under subsections (b), (c), and (f) when a claim for relief is received on the Form 8857 with a revision date of 6/2007.
For claims for relief filed before December 20, 2006, for which the RS only requested relief under IRC 6015(f), the prohibition on collection and suspension of the CSED start on December 20, 2006, and not on the date the claim for relief was received. If the claim for relief filed before December 20, 2006, also included an election under (b) or (c), then the prohibition on collection and suspension of the CSED do begin on the date the claim for relief was received.