Generally, when spouses file a joint return, the spouses are jointly and severally liable for the taxes due on that return, regardless of which spouse actually earned the income. In addition, the spouses are jointly and severally liable for interest and penalties which arise from a jointly filed return. Pursuant to Section 6015, a spouse may be able to obtain relief from the taxes, interest and penalties if the spouse can establish that she is an innocent spouse.
Relief from Proposed or Assessed Deficiencies
Under Section 6015(b), relief from a federal income tax deficiency will be granted to an individual if five requirements are met:
1) A joint return was filed;
2) There was an understatement of tax attributable to erroneous items of the individual's spouse;
3) When signing the return, the individual did not know, or have reason to know, that there was an understatement of tax;
4) In view of all the facts and circumstances, it is inequitable to hold the individual liable for the tax deficiency; and
5) The individual elects to apply for relief no later than two years after the date of the Service's first collection activity after July 22, 1998.
Under Section 6015(c), relief from a federal income tax deficiency will be granted to an individual if four conditions are met:
1) A joint return was filed;
2) At the time that relief is requested, the individual is no longer married to, is legally separated from, or has been living apart at all times for at least 12 months from his or her spouse or former spouse;
3) The individual elects to apply for relief no later than two years after the date of the Service's first collection activity after July 22, 1998; and
4) The liability remains unpaid at the time that relief is requested.
Relief under Section 6015(c) is subject to certain limitations. Relief is not available if assets were transferred between the spouses as part of a fraudulent scheme or in the individual had actual knowledge that an item on the return was incorrect (to the extent that the item contributes to the deficiency).
Under Sections 6015(b) and (c), relief is limited to relief from proposed or assess deficiencies. These sections to not allow the Service to grant relief for amounts which were properly reported on the tax return, but not paid. However, the individual may now be able to obtain such equitable relief under Section 6015(f).
Notice 98-61 gives a non-exhaustive list of criteria that the Service will consider when it determines whether a spouse should be granted innocent spouse relief under Section 6015(f) for joint returns and Section 66(c) for returns that are filed separately but show community income. Under Section 6015(f), in order for equitable relief to be considered for the individual, the individual must meet the following criteria:
1) The spouses made a joint return for the tax year;
2) Relief was not available to the individual under Section 6015(b) or (c);
3) The individual applies for relief no later than two years from the first Internal Revenue Service collection activity that occurred after July 22, 1998;
4) Generally, the liability must remain unpaid at the time that the relief is requested;
5) No assets were transferred between the individuals filing the joint return as part of a fraudulent scheme by such individuals;
6) There were no transfers of disqualifying assets, as defined in Section 6015(c)(4)(B),to the individual from the non-requesting spouse. If disqualifying assets were transferred, the available relief may be limited; and
7) The individual did not file a joint return with fraudulent intent.
An individual that meets the above requirements may be relieved of liability if, after considering all of the facts and circumstances, it would be inequitable for the individual to be held liable for all or a portion of the income tax liability.
Circumstances Where Relief is Generally Granted
Notice 98-61 gives the circumstances under which equitable relief from tax liability will generally be granted:
1) The liability which was reported on the joint return for the year in question was unpaid at the time that the return was filed;
2) The innocent spouse is divorced or separated from the spouse with whom the joint return was filed and has not shared a household with that individual for the previous 12 months.
3) At the time that the return was filed, the innocent spouse had did not know and did not have reason to know that the tax would not be paid; and
4) The innocent spouse would suffer undue hardship if she was not granted innocent spouse relief from the tax liability.
Relief obtained pursuant to the above circumstances are subject to limitations. If the return has been adjusted to reflect an understatement of tax, relief will be granted under Section 6051(f) only to the extent of the liability shown on the return prior to such adjustment. Further, relief will be available only to the extent that the unpaid income tax liability is attributable to the non-requesting spouse.
Factors Considered by the Service Where Separate Returns are Filed
Married individuals who filed separate returns in community property states and are requesting relief under Section 66(c) and those individuals that meet the initial requirements, as set forth above, may be able to obtain equitable relief under Section 6015(f) even when the individual does not have circumstances under relief is generally granted. The individual may qualify for relief if, considering the facts and circumstances, the Service determines that it would be inequitable for hold the individual liable for all or a portion of the income tax liability or deficiency.
In making this determination, the Service will consider the following factors as weighing in favor of relief:
1) The individual is divorced or separated from the non-requesting spouse;
2) The individual will suffer hardship if the relief is not granted. This hardship is not required to rise to the level of hardship under Section 1.6161-1(b);
3) The individual was abused by his or her spouse (but the abuse did not reach to the level of duress); and
4) The non-requesting spouse has a legal obligation, pursuant to a divorce decree or agreement, to pay the income tax liability.
The following factors will be considered negative factors:
1) An unpaid liability or item of income that gave rise to the deficiency is attributable to the spouse requesting relief;
2) The individual knew or had reason to know of the unpaid liability. This is an extremely important factor, however, the Service indicated that there may be circumstances where the individual had knowledge of the unpaid liability but equitable relief is appropriate;
3) The individual has significantly benefitted from the unpaid liability or items giving rise to the deficiency. The benefit that the individual received must be more than normal and regular support; and
4) The individual has a legal obligation pursuant to a divorce decree or agreement to pay the liability.