Tax Tips

Generally, spouses are jointly and severally liable for the tax, interest, and penalties on a joint return. This is so even if they have their own written agreement in which one spouse assumes liability. However, one spouse may be entitled to relief on innocent spouse rules (Code Sec. 6015). Recent court decisions help to clarify certain innocent spouse relief issues. In general, courts have been taxpayer-friendly.

Timing of Request

A spouse seeking innocent spouse relief must prove certain elements:

• A statement that the requesting spouse had no knowledge or reason to know that there was an understatement of tax when the return was filed;
• A statement that the requesting spouse did not benefit from the understatement;
• An acknowledgment that it would be inequitable to hold the requesting spouse liable for the payment;
• The request for relief must be filed within 2 years after the IRS first begins its collection activities.
• The request for innocent spouse relief must be filed in a timely manner.

The Jones Case

A recent case, Jones, DC ND, 2004-1 USTC 50,250, helped define this time frame. In the case, understatements were made on joint returns filed in 1981 through 1984. The husband died and the wife started to pay back taxes following an IRS determination that money was owed. The IRS's collection activity started in January 1998. In April 1998, the wife filed amended returns asserting she was not liable for the deficiency because she was an innocent spouse. On Jan. 22, 1999, the IRS filed a federal lien. In September 2000, she filed Form 8857 seeking innocent spouse relief. A district court easily found that she met the criteria for innocent spouse relief. She did not know about the husband's losses from a tax shelter investment. She lacked financial sophistication so she had no reason to suspect that there was anything wrong with the returns. She did not live a lavish lifestyle, and it would be inequitable to hold her liable for tax related to the tax shelter.

The question remaining for the court to answer was whether the request was timely filed. The IRS argued that collection activities began in January 1998, and a request was not filed until more than 2 years later. The taxpayer argued, however, that the 2-year rule does not take effect until the date of enactment of the innocent spouse rules – July 22, 1998. The only collection activity after that date was the filing of a federal tax lien on Jan. 22, 1999, so that the request was timely.

The court agreed with the taxpayer. According to the court, the 2-year period did not expire until after the first collection activity after July 22, 1998. The January 1998 collection activities were ignored; only the lien in January 1999 was taken into account.

Equivalent to a Refund Request

In another recent case, Rooks, TC Memo 2004-127, a couple filed a joint return in 1992 and divorced in 1997. The IRS withheld refunds owed to the wife for 1998, 1999 and 2001 (it paid her 2000 refund). The 1998 refund was to be used to offset the 1992 tax liability. On March 14, 2001, she requested innocent spouse relief. The IRS granted partial relief; she sought complete relief.

The taxpayer argued that the request should be viewed as a refund claim. A refund claim is timely if made within 3 years after filing the return or within 2 years after paying the tax, whichever is later. An offset to tax liability can be treated as a tax payment.

The Tax Court sided with the taxpayer. It viewed the 2001 request for innocent spouse relief to be equivalent to making a refund request. Since the request was made less than 2 years after the IRS had offset her 1992 liability, it was timely.

Pending Request and Federal Liens

In another case, Beery, 122 TC No. 9 (2004), the IRS determined that a couple was liable for tax deficiencies for several years. The wife filed a request for innocent spouse relief. The IRS denied her request and she appealed to the Tax Court. While the appeal was pending, the IRS filed a federal tax lien against her. She appealed the lien to the Tax Court, arguing that her pending appeal for innocent spouse relief barred the IRS from filing the lien. Unfortunately for the taxpayer in this case, the court sided with the IRS. According to the Tax Court, a pending appeal of an innocent spouse claim does not preclude the IRS from filing a federal tax lien. (By law, the IRS is barred from levying against a taxpayer's property until a court issues a final decision. The law does not contain a similar bar to tax liens.)

Generally, spouses are jointly and severally liable for the tax, interest, and penalties on a joint return. This is so even if they have their own written agreement in which one spouse assumes liability. However, one spouse may be entitled to relief on innocent spouse rules (Code Sec. 6015). Recent court decisions help to clarify certain innocent spouse relief issues. In general, courts have been taxpayer-friendly.

Timing of Request

A spouse seeking innocent spouse relief must prove certain elements:

• A statement that the requesting spouse had no knowledge or reason to know that there was an understatement of tax when the return was filed;
• A statement that the requesting spouse did not benefit from the understatement;
• An acknowledgment that it would be inequitable to hold the requesting spouse liable for the payment;
• The request for relief must be filed within 2 years after the IRS first begins its collection activities.
• The request for innocent spouse relief must be filed in a timely manner.

The Jones Case

A recent case, Jones, DC ND, 2004-1 USTC 50,250, helped define this time frame. In the case, understatements were made on joint returns filed in 1981 through 1984. The husband died and the wife started to pay back taxes following an IRS determination that money was owed. The IRS's collection activity started in January 1998. In April 1998, the wife filed amended returns asserting she was not liable for the deficiency because she was an innocent spouse. On Jan. 22, 1999, the IRS filed a federal lien. In September 2000, she filed Form 8857 seeking innocent spouse relief. A district court easily found that she met the criteria for innocent spouse relief. She did not know about the husband's losses from a tax shelter investment. She lacked financial sophistication so she had no reason to suspect that there was anything wrong with the returns. She did not live a lavish lifestyle, and it would be inequitable to hold her liable for tax related to the tax shelter.

The question remaining for the court to answer was whether the request was timely filed. The IRS argued that collection activities began in January 1998, and a request was not filed until more than 2 years later. The taxpayer argued, however, that the 2-year rule does not take effect until the date of enactment of the innocent spouse rules – July 22, 1998. The only collection activity after that date was the filing of a federal tax lien on Jan. 22, 1999, so that the request was timely.

The court agreed with the taxpayer. According to the court, the 2-year period did not expire until after the first collection activity after July 22, 1998. The January 1998 collection activities were ignored; only the lien in January 1999 was taken into account.

Equivalent to a Refund Request

In another recent case, Rooks, TC Memo 2004-127, a couple filed a joint return in 1992 and divorced in 1997. The IRS withheld refunds owed to the wife for 1998, 1999 and 2001 (it paid her 2000 refund). The 1998 refund was to be used to offset the 1992 tax liability. On March 14, 2001, she requested innocent spouse relief. The IRS granted partial relief; she sought complete relief.

The taxpayer argued that the request should be viewed as a refund claim. A refund claim is timely if made within 3 years after filing the return or within 2 years after paying the tax, whichever is later. An offset to tax liability can be treated as a tax payment.

The Tax Court sided with the taxpayer. It viewed the 2001 request for innocent spouse relief to be equivalent to making a refund request. Since the request was made less than 2 years after the IRS had offset her 1992 liability, it was timely.

Pending Request and Federal Liens

In another case, Beery, 122 TC No. 9 (2004), the IRS determined that a couple was liable for tax deficiencies for several years. The wife filed a request for innocent spouse relief. The IRS denied her request and she appealed to the Tax Court. While the appeal was pending, the IRS filed a federal tax lien against her. She appealed the lien to the Tax Court, arguing that her pending appeal for innocent spouse relief barred the IRS from filing the lien. Unfortunately for the taxpayer in this case, the court sided with the IRS. According to the Tax Court, a pending appeal of an innocent spouse claim does not preclude the IRS from filing a federal tax lien. (By law, the IRS is barred from levying against a taxpayer's property until a court issues a final decision. The law does not contain a similar bar to tax liens.)