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Innocent Spouse Relief - IRS publication

Innocent Spouse Questions and Answers

UPDATED INFORMATION AS OF 9/2004 (LINKS IMMEDIATELY BELOW)

Publication 971 - Additional Material

For assistance, please contact A. Nathan Zeliff, Attorney at Law

CAUTION: BELOW INFORMATION IS HISTORICAL IRS INFORMATION. SEE ABOVE LINK FOR VERSION AS OF 9/2004.

Q.    What is the effective date of the new innocent spouse rules under IRC 6015?

A.    IRC 6015 innocent spouse rules are effective for:

  • Unpaid balances as of July 22, 1998; and
  • Liabilities arising after July 22, 1998

Q.    What is joint and several liability?

A.    Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.


Q.    How can I get relief from joint and several liability?

A.    Relief now falls into three categories: Innocent Spouse Relief; Separation of Liability; and Equitable Relief. Each of these kinds of relief has different requirements. They are explained separately below.


Q.    Can both spouses request relief?

A.    Yes, each spouse can file a Form 8857 to request relief from liability from tax, interest and penalties.


Q.    Does the non-requesting spouse have any appeal rights?

A.    The non-requesting spouse has no appeal rights, unless that spouse files his/her own claim. If relief is denied and the requesting spouse petitions the U.S. Tax Court, the non-requesting spouse, by law, will be given the opportunity to be a party in that proceeding.


Q.    Will the other spouse be notified that I filed a claim for innocent spouse relief?

A.    The IRS is required to notify the non-requesting spouse to allow them to participate. They will also be notified of the determination on your election although they cannot protest it.


Q.    What are the rules for Innocent Spouse Relief?

A.    To qualify for innocent spouse relief, you must meet all of the following conditions:

  • You must have filed a joint return which has an understatement of tax;
  • The understatement of tax must be due to erroneous items of your spouse;
  • You must establish 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;
  • Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and
  • You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998

Q.    What are erroneous items?

A.    Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not reported on the return.


Q.    What is an understatement of tax?

A.    An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return. For example, you reported total tax on your 1996 return of $2,500. IRS determined in an audit of your 1996 return that the total tax should be $3,000. You have a $500 understatement of tax.


Q.    Will I qualify for innocent spouse relief in any situation where there is an understatement of tax?

A.    No. There are many situations in which you may owe tax that is related to your spouse, but not be eligible for innocent spouse relief. For example, you and your spouse file a joint return that reports $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. You are not eligible for innocent spouse relief when you have knowledge of the understatement.


Q.    What are the rules for Separation of Liability?

A.    Under this type of relief, you divide (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse. The understatement of tax allocated to you is generally the amount of income and deductions attributable to your earnings and assets. To qualify for separate liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857:

  • You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
  • You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12 month period ending on the date you file Form 8857.

Q.    Why would a request for separate liability be denied?

A.    Even if you meet the requirements listed above, a request for separate liability will not be granted in the following situations:

  • The IRS proves that you and your spouse transferred assets for the main purpose of avoiding payment of tax.
  • The IRS proves that at the time you signed your joint return, you had actual knowledge that any items giving rise to the deficiency and allocable to your spouse were incorrect.

Q.    If a husband and wife are still married but separated for 12 month, prior to filing a claim for relief due to an involuntary reason such as incarceration or military duty, can separation of liability relief be granted?

A.    Separation of liability applies to taxpayers no longer married, separated, or not living together for a period of 12 or more months preceding the filing of a claim. A claim can be filed if any of the three statutory requirements are met.


Q.    What are the rules for Equitable Relief?

A.    Equitable relief is only available if you meet all of the following conditions:

  • You do not qualify for innocent spouse relief or the separation of liability election.
  • The IRS determines that it is unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances.
  • Note: unlike innocent spouse relief or separation of liability, if you qualify for equitable relief, you can get relief from an understatement of tax or an underpayment of tax. (An underpayment of tax is an amount properly shown on the return, but not paid.)

Q.    What Factors are considered in determining whether or not to grant equitable relief?

A.    The following factors will be considered, but the list is not all-inclusive:

  • Current marital status
  • Abuse experienced during the marriage
  • Reasonable belief, at the time you signed the return, that the tax was going to be paid
  • Current financial hardship
  • Underpayment or understatement attributable to the non requesting spouse
  • Lack of significant benefit received by the requesting spouse

Q.    How do state community property laws affect my ability to qualify for relief?

A.    Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, community property laws require you to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to you or your spouse (or former spouse) for purposes of requesting any relief from liability.


Q.    How do I request relief?

A.    File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. You need not file multiple forms. One form can cover multiple years.


Q.    Should I include a letter when filing Form 8857?

A.    Yes, we request that you attach a statement to the Form 8857, providing additional information you wish to be considered.


Q.    If I an denied innocent spouse relief, must I reapply if I believe I might qualify under one of the other two provisions?

A.    No. The IRS automatically will consider whether any of the other provisions would apply.


Q.    I applied for innocent spouse relief before the law changed (July 22, 1998). Do I need to reapply?

A.    No. The Service will consider your request under the new law as long as the liability was unpaid as of July 22, 1998.


Q.    Will the IRS deny me relief if I do not provide them with the information they request?

A.    IRS will base their decision upon all the information available to them. If enough information is not available, it could adversely affect a request for relief.


Q.    I filed a Form 656, Offer in Compromise, under doubt as to liability. The IRS accepted the Offer in Compromise. Can I still apply for innocent spouse relief?

A.    No. We cannot consider your claim for any year in which an Offer in Compromise was accepted. Acceptance of an Offer in Compromise conclusively closes the tax year(s) compromised from any re-determination of the tax liability.


Q.    I signed a closing Agreement, can I still apply for innocent spouse relief?

A.    It depends on the type of closing agreement you signed.

  • If you signed Form 866, Agreement as to Final Determination of the Tax Liability, the tax year is closed with finality and you cannot apply for innocent spouse relief.
  • If you signed Form 906, Closing Agreement on Final Determination Covering Specific Matters, only those matters covered in the closing agreement are conclusively closed. Innocent spouse relief may be requested for matters for covered in the closing agreement.

Q.    When should I file Form 8857?

A.    Follow the instructions on Form 8857.


Q.    I am currently undergoing an examination of my return. How do I request innocent spouse relief?

A.    File Form 8857 with the employee assigned to examine your return.


Q.    What is the IRS has levied my account for the tax liability and I decide to request relief?

A.    All collection activity is suspended, regarding the requesting spouse, from the date the request is received by the Service until a final determination is made.


Q.    What constitutes a collection activity for purposes of starting the two-year statute of limitations the cover the filing of Form 8857?

A.    A collection activity starts when the IRS makes an actual levy or seizure, or files a judicial suit or claim that puts the requesting spouse on notice the IRS intends to collect the joint tax liability from specific property belonging to that spouse.


Q.    I filed a valid joint return with my spouse and have an installment agreement to pay the taxes. Can I still apply for relief?

A.    The innocent spouse rules may apply in your situation. However, regarding the installment agreement, there are some important considerations:

  • If you do not continue to make payments while we consider your request for relief, your installment agreement will default and full payment will be due immediately if your request for relief is denied.
  • If you are granted relief under IRC 6015(b), you will be entitled to a refund of payments made while we considered your request.
  • If you are granted relief under IRC 6015(c), you will not be entitled to a refund of any payments made.
  • If you are granted relief under 6015(f), you will be refunded any payments made from the date of your request for relief.

Q.    What is injured spouse relief?

A.    Injured spouse relief is different from innocent spouse relief. When a joint return is filed and the refund is used to pay one spouse's past-due child and/or spousal support, a past-due federal debt, or past-due state income tax, the other spouse may be considered an injured spouse. The injured spouse can claim his/her share of the refund using Form 8379, Injured Spouse Claim and Allocation. To be considered an injured spouse, you must have:

  • filed a joint return;
  • received income (such as wages, interest, etc.);
  • made tax payments (such as withholding or estimated tax payments);
  • reported the income and tax payments on the joint return; and
  • an overpayment, all or part of which was applied to the past-due amount of the other spouse.

Q.    How can I get more information about innocent spouse relief?

A.    Call the IRS Tax Forms line at 1-800-829-3676 and request Form 8857 and Publication 971, Innocent Spouse Relief (and other relief for joint filers).


Q.    My spouse forged my signature to a joint return. Am I eligible for innocent spouse relief? Should I file Form 8857?

A.    You are eligible for relief, but relief does not fall under the innocent spouse rules. If you can establish your signature was forged, and there was not tacit (implied) consent, the return is invalid with respect to you.


Q.    What is the meaning of "undue Hardship" for purposes of equitable relief of an underpayment of tax liability shown on a tax return?

A.    "Undue hardship" means significant hardship, i.e., more than an inconvenience to the taxpayer. It means the taxpayer will incur substantial personal or financial loss if required to pay the tax liability.


Q.    Will I receive a refund of all amounts I paid, if relief is granted?

A.    It depends upon the provision under which relief is granted.

  • If relief is granted under section 6013(e), refunds are allowed for amounts paid for the period beginning two years prior to the date the claim was filed and ending July 21, 1998.
  • If relief is granted under section 6015(b), refunds are allowable for amounts paid on or after July 22, 1998.
  • If relief is granted under section 6015(c), no refunds are allowable.
  • If relief is granted under section 6015(f), refunds are allowable for amounts paid between July 22, 1998 and April 15, 1999. Refunds are also allowable for amounts paid after the later of the date the claim was filed or July 22, 1998 pursuant to an installment agreement, provided the installment agreement is not in default.

Q.    Will I be granted innocent relief with respect to unreported income if I feel it is my accountant's fault that the income was not reported on the return?

A.    Innocent spouse relief is in no way meant to transfer the claim to an accountant. If the income was yours (rather than your spouse's), or was your spouse's but you knew about it, you will probably not be relieved of liability.


Q.    If an understatement is the result of signing an examination report that lists omissions of income, does this indicate there was knowledge of items giving rise to the deficiency?

A.    No, innocent spouse provisions clearly state the knowledge has to do with what was known at the time the return was signed.

Thursday, 04-Nov-1999 12:39:44 EST    Source of above: http://www.irs.ustreas.gov/prod/bus_info/tax_pro/innocent.html

_________________________________

Caution: A tax professional, who routinely deals with IRS collection matters and Innocent Spouse Relief, should be consulted before any action is taken.

The above limited information is intended for informational purposes only.  If legal advice or other expert assistance is required, the services of a competent professional should be sought, and this general information should not be relied upon without such professional assistance. 

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For assistance, please contact A. Nathan Zeliff, Attorney at Law

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