Innocent Spouse Claims – What You Should Know
Filing taxes is something most U.S. Citizens have to do, it’s a regular part of life and economic support. There are different statuses that a person can use for their tax returns, and married couples have the option of filing jointly. This option is beneficial to couples in most cases. However, a downside to it would be that each spouse is jointly and severally liable for the full amount of taxes on the return. This becomes an issue when a couple may be in the middle of a divorce, dealing with spousal abandonment, coping with the passing of a spouse, or other extreme cases where innocent spouse relief may apply.
The Taxpayer First Act (TFA) is providing greater protection for innocent spouses by now giving the Tax Court the authorization to take a fresh look at innocent spouse cases with newly discovered or previously unavailable evidence. The TFA also codified a limitations period for claiming equitable relief under IRC Sec. 6015(f).
Innocent spouse relief is available to all joint filing individuals who meet certain criteria. To be considered the following conditions must be met:
• He or she filed a joint income tax return.
• There is an understatement of tax on the return that is attributable to an erroneous item of the other spouse.
• When the innocent spouse signed the return, he or she didn’t know, or had no reason to know, of the understatement of tax.
• Considering all facts and circumstances, it would be inequitable to hold the innocent spouse liable for the deficiency. Relevant factors include whether the innocent spouse has been deserted, divorced, or separated from the other spouse; and whether the innocent spouse significantly benefited, directly or indirectly, from an item of omitted income [Reg. 1.6015-2(d)].
The innocent spouse relief is only available to joint filers who are no longer married, are legally separated, or have lived apart from each other for the past 12 months [IRS Sec. 6015(c)(3)(A)]. To use this election, the innocent spouse must show that the understatement of tax (a mere underpayment does not qualify) is attributable to an erroneous item from the other spouse.
If the criteria for innocent spouse relief is not met, there is another liability election option – Equitable Relief. The following conditions must apply for him or her to be considered for equitable relief:
• The innocent spouse filed a joint income tax return.
• Relief is not available under IRC sec. 6015(b) or 6015(c).
• The claim for relief is filed in a timely manner.
• No assets were transferred between the spouses as part of a fraudulent scheme.
• The nonrequesting spouse didn’t transfer disqualified assets to the requesting spouse. A disqualified asset is any property (or right to property) transferred with the principal purpose of avoiding tax or the payment of tax [IRC sec. 6015(c)(4)(B)]. This condition doesn’t apply in certain situations, including abuse.
• The requesting spouse didn’t knowingly participate in the filing of the fraudulent joint return.
• The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income.
• Considering all facts and circumstances, it would be inequitable to hold the innocent spouse liable for the unpaid portion of tax or a deficiency.
Under the TFA, all petitions and requests filed or pending on or after July 1, 2019 should be reviewed by the Tax Court if the spouse determination (including equitable relief claims) was on a de novo basis. The Court must base its findings on (1) the administrative record established at the time of the IRS’s determination and (2) any additional newly discovered or previously unavailable evidence.
When it comes to the codification of equitable relief limitations period, the TFA has codified the IRS’s policy. Now innocent spouses can request equitable relief with respect to any unpaid liability before the expiration of the collection period or, if paid, before the expiration of the applicable limitations period for claiming a refund or credit [IRC Sec. 6015(f)(2)]. For an unpaid liability, the collection period generally expires 10 years after the assessment of tax [IRC Sec. 6502]. For a refund or credit claim, the time period expires three years from the time the tax return was filed or two years from the time the tax was paid, whichever is later [IRC Sec. 6511].
Every tax situation is unique. Should you have questions about the innocent spouse relief, or other tax issues, please consult with your trusted advisers. Our team at MNMW is happy to help, call or contact us here, if you would like to discuss any of the above items.