For a taxpayer to be innocent spouse relief qualified, he or she must first satisfy several threshold requirements for all forms of spousal relief. These initial requirements which form the prima facie basis for determining whether an innocent spouse claim is appropriate include:
- Was a joint tax return filed? Innocent spouse relief is, generally, only available when taxpayers file a joint tax return for the tax year in question. Even when the joint return is not signed by both spouses, the possibility exists that innocent spouse relief will be available through tacit consent or through other grounds.
- Is the tax debt in question stemming from an income tax obligation? While innocent spouse relief can allow a taxpayer to avoid liability for unsatisfied income taxes, penalties, and interest, it does not apply to tax mistakes involving FBAR violations, payroll tax violations, or other tax errors involving the trust fund recovery penalty (TFRP).
- Was there a timely election for relief? Regardless of the form of innocent spouse relief requested, the request for relief must be timely. If relief is sought under IRC Sections 6015(b) or (c), a timely election is made within two years of the start of collection activities. If relief is sought under IRC Section 6015(f), then a timely petition generally conforms to the 10-year statute of limitations on collection.
In addition to these universal threshold requirements which apply regardless of the type of innocent spouse relief sought, additional supplemental requirements apply depending on the form of spousal relief you seek.
What Additional Standards Must a Taxpayer Meet to Qualify for Traditional Innocent Spouse Relief?
Traditional innocent spouse relief is sought when a taxpayer files a relief petition under Section 6015(b). It is important to note that this is the most difficult type of spousal relief to achieve. As a starting point, relief under this section is only available in cases involving a tax deficiency (understatement of tax). It is not available when the taxpayer has simply failed to pay taxes.
One reason it is so difficult to qualify for this form of relief is because the spouse requesting the relief must certify that he or she did not know about the understatement and furthermore that he or she had no reason to know about the understatement on the tax return. While this is a difficult standard to achieve, it is possible for even an extremely wealthy spouse who might incorrectly assume that a court is likely to conclude that they are a sophisticated party who should have known about the understatement.
For example, In re Wyly, 552 B.R. 338 (Bankr. N.D.Tex. 2016) was a case that involved a tax dispute over the fortune and tax practices of the late Charles Wyly. Charles and his brother had acquired controlling stakes in a number of high-tech and retail operations. The brothers transferred their interests to trusts, set-up in the Isle of Mann for tax benefits. However, the offshore tax arrangement was not looked upon favorably by regulators. The Estate of Charles Wyly and his brother, Sam, were hit with a $300 million SEC judgment and filed for Chapter 11 bankruptcy in 2014.
As part of the bankruptcy proceedings Charles’ widow, Dee, filed a motion for innocent spouse relief to oppose the IRS’s claims. Despite the court’s determination that no business reason existed for the incredibly complex financial arrangements, the judge also found that Dee bore no responsibility for her late husband’s actions. In a 400-page opinion, the judge set forth the reasons why Charles Wyly’s widow had no knowledge or reason to know about her late husband’s actions.
What Standards Must a Taxpayer Meet to Qualify for Spousal Allocation Relief under IRC § 6015(c)
An election for relief under §6015(c) must meet all of the general requirements set forth for spousal relief. In addition to these general requirements, a taxpayer must also and at the time of the election, have obtained a divorce, separation or is otherwise no longer married to the responsible spouse. Alternatively, the electing spouse may also file when he or she has not been a member of the same household for the previous 12 months ending on the date the election was filed.
In addition to the foregoing, here, the IRS carries the burden of proving that the applicant had actual knowledge “of the item on the return that gave rise to the deficiency (or portion thereof).” Chesire v. Commissioner , 115 T.C. 183 (2000). Relief can be denied only if the IRS can prove that the taxpayer had actual knowledge of the event or transaction that gave rise to the tax deficiency.
What Standards Must a Taxpayer Meet to Qualify for Equitable Spousal Relief under IRC § 6015(f)?
Taxpayers who seek equitable relief under Section 6015(f) generally do so because relief under Sections (b) and (c) have already been denied. In fact, a taxpayer can only properly petition for relief under this section when traditional and allocated innocent spouse relief have been denied. Further threshold inquiries for this form of relief include ensuring that the spouses have not engaged in transactions the court views as fraudulent. Certain exceptions exist for transactions that occurred in the context of an abusive relationship or a relationship where the spouse had no or restricted access to financial information.
If the above threshold conditions are met, equitable relief eligibility can be determined through streamlined procedures. Streamlined procedures will consider whether the petitioning spouse is no longer married to the responsible spouse, if the petitioning spouse had actual knowledge or a reason to know about the tax understatement, and if economic hardship would occur if relief was denied.
If non-streamlined procedures are triggered, an array of factors will be considered in determining whether to grant relief. These factors include:
- Presence of abuse in the relationship.
- Current marital status.
- Actual knowledge
- Whether the taxpayer should have known about tax improprieties or transactions.
- The individual’s level of education.
- The mental and physical health of the petitioning party.
- Which spouse held the legal obligation that gave rise to the tax.
- Has the petitioning party received “significant benefit” from the unpaid tax?
- Was a good faith effort made to comply with subsequent tax obligations?
Here, no factor is controlling and a court will weigh all factors as positive, neutral, or negative. It is important to work with an attorney who can address each of these factors in a strategic and compelling manner.
