Can I Engage in Tax Planning to Avoid Common Innocent Spouse Relief Scenarios?

Taxpayers may be concerned about facing innocent spouse relief scenarios where one spouse’s mistakes, irresponsible financial habits, or risks end up creating a large, potentially unmanageable tax debt owed by both spouses. While there are many approaches to addressing an issue of this type, potential solutions should be tailored to address the circumstances faced by the individual taxpayer spouse. Nevertheless, there are some general considerations applicable to most married couples.

Potential Difficulties in Spousal Tax Planning in California

For one, taxpayers can avoid filing joint tax returns, however, even this approach may be of limited benefit in a community property state like California because of broad collection powers authorized under state law. Furthermore, even a divorce decree contemplated and executed under state law is not generally binding on the IRS because the tax agency was not a party to the agreement. However, there are still considerations that should be analyzed and language that should be included in these and other documents. Working with a Tax Attorney from the outset of a marriage can reduce the likelihood that tax mistakes or oversights will become a burden or hardship.

Can Spouses Consider Tax Issues from the Outset of Marriage?

By default, California is a community property state. A community property regime can have notable impacts on a taxpayer’s tax issues, property, and reasonable collection potential with the federal and California taxing authorities. However, spouses in California are free to enter into a prenuptial agreement which can effectively modify community property obligations and duties.

How Can an Attorney Help a Taxpayer File for Innocent Spouse Relief?

There are a number of forums through which a taxpayer can bring a claim for innocent spouse relief. An Attorney will advise on where to bring the claim to ensure that the taxpayer has a reasonable likelihood of securing the innocent spouse relief scenarios he or she needs along with other legal goals. Working with a Tax Lawyer can help you determine how to approach a tax relief issue. He or she may recommend pursuing the action in forums including:

  • US Tax Courts – This is perhaps the most obvious forum in which to bring the action for relief. This is a forum where a taxpayer can bring his or her request for relief without being required to pre-pay the balance of the tax debt. However, this advantage is balanced by the fact that the non-moving spouse is free to intervene in the matter and may file a motion to oppose the relief.
  • Federal District Court – Matters may also be brought in federal district court. However, taxpayers are required to pre-pay the full amount of the tax debts and penalties before filing their matter. Pre-paying a tax debt is outside the means of many taxpayers so this is not always a viable approach.
  • U.S. Bankruptcy Court – A large tax debt along with other liabilities may push a taxpayer into bankruptcy. However, a taxpayer may file innocent spouse and other tax relief claims as part of a bankruptcy proceeding. Advantages of proceeding in this fashion can include efficiency, no pre-payment requirement, and a relatively taxpayer-friendly forum.

While other approaches may be available, they are less common and should only be considered after consultation with an experienced Tax Lawyer.

Is there Certain Language that Should be Included in a Divorce Decree?

While a divorce decree is not binding on the IRS or other branches or agencies of the federal government, it is still prudent to include certain language in a divorce decree if one spouse believes that he or she will apply for innocent spouse relief. If the non-benefiting spouse generally agrees that innocent spouse relief is necessary, it is wise to record this sentiment in the divorce decree. It is also wise to include language that obligates the non-benefiting spouse to complete IRS Form 12508 (Questionnaire for Non-Requesting Spouse) to assist the moving spouse’s application.

More specifically, it can also be wise to drill down into some of the major details concerning the innocent spouse relief application. It is wise to set forth certain facts in the divorce decree to better position oneself with their forthcoming innocent spouse petition. Specific facts spouses may wish to set forth / include whether certain understatements are solely attributable to one spouse or one spouse’s business activities. It may also be wise to set forth which tax debts a specific spouse has agreed to pay. Furthermore, language setting forth the innocent spouse’s lack of actual knowledge and a lack of a “reason to know” about tax fraud can also be key elements in criminal tax defense and tax collection / restitution planning.

What Are the First Steps an Attorney Takes to Determine if Innocent Spouse Relief is Possible?

When a taxpayer presents a tax scenario where innocent spouse relief might be a viable option, the first step is to determine whether a joint tax return was filed. While exceptions exist, innocent spouse relief does typically require a joint tax return signed by both parties. If a tax attorney does determine that a joint tax return was utilized or the taxpayer otherwise qualifies, he or she will begin to determine whether traditional innocent spouse relief, spousal allocation, or equitable relief are likely to address the tax concerns.