In 1998, new laws were made to help people who were innocent spouses and unfairly being held responsible for joint tax debts. These laws made it easier for innocent spouses to get relief from the IRS. This article will discuss the old rules, the new rules, and how the courts have interpreted them. Part II will discuss more about the new law, regulations, IRS procedures, and what to expect when applying for innocent spouse relief. Before 1998, if you filed a joint tax return with your spouse and there was a mistake or you owed more money, both of you were responsible for paying it. To get out of this, the innocent spouse had to prove 4 things: 1) the mistake was on a joint return, 2) the mistake was big and was because of the non-innocent spouse, 3) the innocent spouse didn’t know about the mistake when they signed the return, and 4) it would’t be fair for the innocent spouse to have to pay the tax. The innocent spouse had to prove all 4 things or they wouldn’t be able to get out of paying. The IRS didn’t like to give this relief, and it was really hard for innocent spouses to prove they didn’t know about the mistake, especially years later. In 1998, Congress passed a new law to make it easier for innocent spouses to get relief from tax debt if their partner made mistakes on their joint tax return. The new law removed some of the old requirements, like the understatement needing to be “substantial” and the innocent spouse needing to have “grossly” erroneous items. It also got rid of the $500 threshold and adjusted gross income threshold. Now, an innocent spouse can get relief if they didn’t know about the mistakes on the tax return when they signed it, and it wouldn’t be fair to hold them responsible. The law also allows for the tax debt to be split between the innocent and non-innocent spouse if only one of them knew about the mistakes. The Tax Court is using old cases to decide on claims for innocent spouse relief under a law called §6015(b). Most cases involve whether the innocent spouse knew about the tax mistake and if it’s unfair to hold them responsible for it. If the mistake was from not reporting income, the innocent spouse won’t get relief if they knew about the income. But just knowing about the general transaction isn’t enough, they have to know enough to ask about the tax treatment of the money. For example, in a case called Braden v. Commissioner, the Tax Court said a man didn’t have enough knowledge to be held responsible for his wife’s tax mistake because he only knew she got money from her father’s estate, not that it was from a taxable account. The tax court uses the “reasonably prudent taxpayer” standard to decide if an innocent spouse knew about a tax understatement. Factors include the spouse’s education, involvement in family finances, spending habits, and the non-innocent spouse’s honesty. In one case, a wife was granted innocent spouse relief because she didn’t know about her husband’s unreported income from sports memorabilia. Even if the innocent spouse didn’t know about the understatement, they still have to show that it’s not fair to hold them responsible for it. The court looks at whether the innocent spouse benefited from the understatement. If they did, relief is usually denied. A new rule allows divorced or separated couples to divide the tax liability based on each spouse’s income, with the innocent spouse’s portion limited to their own income. The innocent spouse has the burden of proof for the division of the deficiency. If the IRS wants to deny relief, they have to prove that the innocent spouse actually knew about the item causing the understatement. If the return was signed under pressure, even if the spouse knew about the understatement, relief may still be granted. There’s no fairness requirement under this rule. In cases where one spouse is innocent of tax errors made by the other spouse, the key issue is whether the innocent spouse knew about the mistake. The Tax Court has said that the innocent spouse must have a clear awareness of the mistake, not just a reason to know about it. In one case, the court ruled that the innocent spouse did have knowledge of the mistake because she knew about the income and the amount of the income, even though she didn’t know the tax consequences. In another case, the court ruled in favor of the innocent spouse because her knowledge of the transaction was minimal and superficial, and she didn’t know the amount of the financial gain that was misreported. In a Tax Court case, the court found that a taxpayer qualified for relief because they didn’t know about income from their spouse’s business being left out of their tax return. The court said that the taxpayer should have known about the income because they had access to the business’s financial records, but the IRS didn’t prove that the taxpayer actually knew about the omitted income. The court is using a standard that conflicts with the law’s history, which says the IRS has to prove that the innocent spouse knew that something on their return was wrong in order to deny relief. When it comes to deductions being disallowed, the court said the IRS has to prove that the taxpayer actually knew about the specific facts that made the deduction not allowed. For example, in another case, the court said a taxpayer didn’t know about the problems with her ex-husband’s deduction for raising cattle, so she qualified for relief. If a taxpayer can prove that they were forced to sign a tax return under duress, they can be relieved of liability for any deficiencies, even if they knew about the issues on the return. In a specific case, a court ruled that a woman was not able to resist her husband’s demands due to his mental illness, and she would not have signed the returns with mistakes if she had a choice. In the next article, we’ll discuss the part of the law that deals with fairness, the rules for claiming innocent spouse relief from the IRS, and whether this relief is being granted as intended by Congress. The Internal Revenue Code has a provision called §6015, which helps innocent spouses who are unfairly held responsible for their partner’s tax problems. This provision was created because the government recognized that the previous rules were too strict. Innocent spouses often struggle to prove their lack of knowledge about their partner’s tax issues, and the legal process can be difficult. The law allows for relief in certain situations, and there are specific rules and requirements to qualify for this relief. It’s important for innocent spouses to seek help from a tax professional if they find themselves in this situation. Frances D. Sheehy and Anthony J. Scaletta are both lawyers who specialize in tax law. They help people with tax issues and disputes with the IRS. They received their law degrees from different universities and have a lot of experience in this area. They also got help from some people at the Internal Revenue Service for their work. This article was written for the Tax Section of The Florida Bar.
Source: https://www.floridabar.org/the-florida-bar-journal/the-continuing-evolution-of-the-new-innocent-spouse-rules-as-implemented-and-interpreted-by-the-internal-revenue-service-and-the-courts-part-i/
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