Tax Court Grants Innocent Spouse Relief to Widow
A wife who learned--only after the death of her
husband--of the extent of the couple’s financial liabilities, which
included substantial unpaid taxes, has been granted equitable innocent
spouse tax relief under IRC Section 6015.
Background
IRC Section 6015 was enacted to provide relief to spouses who had no knowledge
of an underlying income or deduction item that created a federal tax
deficiency and who did not significantly benefit from it. A taxpayer can
claim innocent spouse relief in one of three ways: by timely filing IRS Form
8857 and meeting its associated requirements, seeking separation of
liability relief or seeking equitable relief. Also, Congress has recently
expanded the Tax Court’s jurisdiction in hearing appeals that relate to
assertions of equitable relief from joint tax liability under IRC Section 6015.
Taxpayer Election Required
A taxpayer can claim innocent spouse relief under the tax law by making and
filing a timely election. Specifically, Form 8857 must be filed no later
than two years after the date the IRS begins collection activities regarding
the individual making the election. Under IRC Section 6015(b), the taxpayer
must also (1) file a joint return that has an understatement of tax due to
“erroneous items” attributable to the nonpetitioning spouse, (2) demonstrate
that the taxpayer did not know, and had no reason to know, that an
understatement of tax existed and (3) show that it would be unfair--taking into account all the facts and circumstances--to hold the
petitioning taxpayer responsible for the understatement of tax. (See IRS
Publication 971, Innocent Spouse Relief.)
Allocation and Equitable Solutions
Federal tax law also allows a spouse to seek “separation of liability,”
which in essence allocates any unpaid understatement of tax, penalties and
interest between the taxpayer and the taxpayer’s nonpetitioning spouse.
Requirements apply, such as showing that the couple was either divorced or
legally separated at the time Form 8857 was filed or that one of the
spouses was deceased.
The IRS has wide latitude in deciding, after taking into account all the
facts and circumstances, whether to grant equitable spousal relief from tax
liability. Under IRC Section 6015(f), relief can be granted if it is
inequitable to hold the nonpetitioning spouse liable.
Sunleaf v. Comm’r
A recent Tax Court decision, Sunleaf v. Comm’r (TC Memo. 2009-52,
3/11/2009), is an example of a successful claim for innocent spouse relief.
The surviving spouse in that case testified that she had no knowledge of the
state of the couple’s financial affairs until some time after her husband’s
passing. He had handled all of their finances, and all IRS correspondence
was sent to his post office box. Tax deficiencies had existed for several
years.
The IRS denied the surviving spouse’s claim for innocent spouse relief on
the ground that she failed to meet one of the criteria under Revenue
Procedure 2003-61, Section 4.02; namely, that the petitioner must not have
known or have had reason to know that her deceased spouse would not pay the
deficient tax amount. Also, simply by signing the income-tax return at
issue, the IRS argued, the petitioner had constructive knowledge of the
underpayment of their tax liability.
The Tax Court, however, found that the IRS’s positions did not mesh with the
facts. The Tax Court concluded that, under the circumstances, it was
reasonable for the petitioner to believe that her husband would pay the tax
liability at the relevant time.
Conclusion
Continuing a trend, recent developments seem to indicate a policy shift
toward protecting innocent spouses from tax abuses committed by a spouse or
ex-spouse. A petitioner who suffers economic hardship and who does not
benefit from the underpayment of a tax liability now has an increased chance
of receiving equitable relief.
This newsletter is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Steve Riddle,
Tom
Thieme,
Rex Collins or
Doug
Ayres
of our
Litigation & Valuation Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
info@somersetcpas.com
