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New Guidance For Spouses Requesting Equitable Relief From Tax Liability
By: Robert T. Leonard, J.D., C.P.A.

As a general rule, when a married couple files a joint return, each spouse is jointly and severally liable for the tax due and for interest and penalties that may become due [IRC Sec. 6013(d)(3)]. The liability exists 100% for both spouses even if they later divorce regardless of the division of responsibility set out in the divorce decree. Congress recognized it can be inequitable to impose joint and several liability on a spouse who lacks knowledge of the entries on the joint return causing the understatement of tax, and so statutorily exempted such an innocent spouse from joint and several liability.

Relief under IRC Sec. 6015

IRC Sec. 6015 provides three potential sources of relief to spouses and former spouses facing joint and several liability problems:

1. IRC Sec. 6015(b) provides a “general” relief rule available to all joint filers, including those who are still married.

2. IRC Sec. 6015(c) authorizes a “separate liability election” for joint filers who at the time an election is filed (a) are divorced or legally separated from the other party to the joint return in question or (b) have lived apart from the other party for the preceding 12 months.

3. When neither IRC Sec. 6015(b) nor 6015(c) applies, an innocent spouse may still obtain relief under the equitable relief provisions of IRC Sec. 6015(f).

For example, assume that Tom and Diane’s divorce is final in 2002. In 2001, Tom earned but didn’t report $15,000 from doing some freelance photography work, while Diane failed to report $5,000 from babysitting. In 2003, the IRS assesses a tax deficiency attributable to the unreported income. If Tom makes the separate liability election, his deficiency is limited to 75% ($15,000 ÷ $20,000) of the total deficiency. If Diane makes the separate liability election, her deficiency is limited to 25% of the total deficiency. If either Tom or Diane fails to make the separate liability election, he or she is liable for the entire deficiency under the general joint and several liability rules unless relief is available under IRC Sec. 6015(b) or IRC Sec. 6015(f).

Relief under IRC Sec. 66(c)

IRC Sec. 66(c) provides spouses in community property states with special relief from reporting and paying tax on certain community income. A requesting spouse who does not know and had

no reason to know about certain items of omitted community income attributable to the other spouse (i.e., was not notified by the earning spouse) is not liable for tax on those items. Instead, those items must be reported entirely by the other spouse.

Equitable Relief

IRC Sec. 6015(b) and (c) specify two sets of circumstances when relief from joint return liability is available. When relief is not available under those provisions, IRC Sec. 6015(f) authorizes the IRS to grant equitable relief if, taking into account the facts and circumstances, it would be inequitable to hold the requesting spouse liable for any unpaid tax or deficiency, or portion thereof. IRC Sec. 66(c) provides a similar equitable relief rule for spouses in community property states.

In Rev. Proc. 2000-15 (2000-1 CB 447), the IRS provided guidance on equitable innocent spouse relief, which applies to spouses requesting relief under IRC Sec. 6015(f) or 66(c) for any tax liability arising after July 22, 1998, or any tax liability arising on or before July 22, 1998 that was unpaid on that date. Rev. Proc. 2000-15 has now been superseded by Rev. Proc. 2003-61 (2003-32 IRB), which applies to requests for relief filed on or after November 1, 2003, and to requests for relief pending on that date for which no preliminary determination letter has been issued as of November 1, 2003.

Rev. Proc. 2003-61 applies to spouses who request either equitable relief from joint and several liability under IRC Sec. 6015(f), or equitable relief under IRC Sec. 66(c) from income tax liability resulting from the operation of community property law. Section 4.01 of Rev. Proc. 2003-61 provides the threshold requirements for any request for equitable relief. Section 4.02 lists the conditions when the IRS “ordinarily will grant equitable relief under [IRC Sec.] 6015(f) from an underpayment of income tax reported on a joint return,” while Section 4.03 provides a nonexclusive list of factors to be considered in determining whether relief should be granted.

Compared to Rev. Proc. 2000-15, newly issued Rev. Proc. 2003-61 (1) adds a new threshold requirement under Section 4.01(7), (2) revises the weight given to the knowledge or reason to know factor, and (3) broadens the availability of refunds if equitable relief is granted.

Eligibility for Equitable Relief

A requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under IRC Sec. 6015(f). With the exception of conditions (1) and (2), a requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under IRC Sec. 66(c).

1. The requesting spouse filed a joint return for the tax year for which he or she seeks relief.

2. Relief is not available to the requesting spouse under IRC Sec. 6015(b) or (c).

3. The requesting spouse applies for relief no later than two years after the date of the IRS’s first “collection activity” (see the discussion below) after July 22, 1998.

4. No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.

5. The nonrequesting spouse (the individual with whom the requesting spouse filed the joint return) did not transfer disqualified assets to the requesting spouse. If the nonrequesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets. For this purpose, the term “disqualified asset” has the meaning given the term by IRC Sec. 6015(c)(4)(B).

6. The requesting spouse did not file or fail to file the return with fraudulent intent.

7. The income tax liability at issue is attributable to an item of the nonrequesting spouse, unless an exception applies (e.g., the item is attributable to the requesting spouse due to the operation of community property law, or because of prior abuse, the requesting spouse didn’t challenge the treatment of items on the return for fear of retaliation by the nonrequesting spouse).

Circumstances When IRS Ordinarily Will Grant Equitable Relief

The IRS ordinarily will grant equitable relief under IRC Sec. 6015(f) when all of the following elements are satisfied:

1. On the date of the request for relief, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the request for relief.

2. On the date the requesting spouse signed the joint return, he or she had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability. The requesting spouse must establish that it was reasonable to believe that the nonrequesting spouse would pay the reported income tax liability (or a certain portion of the unpaid income tax liability).

3. The requesting spouse will suffer economic hardship if the IRS does not grant relief, based on rules similar to those found in Reg. 301.6343-1(b)(4).

Factors for Determining Whether to Grant Equitable Relief

As already noted, Section 4.03 of Rev. Proc. 2003-61 provides a nonexclusive list of factors for determining whether it would be inequitable to hold the requesting spouse liable for all or part of the unpaid income tax liability or deficiency, and so whether full or partial equitable relief under IRC Sec. 66(c) or 6015(f) should be granted. No single factor controls, and the IRS will consider all relevant factors, regardless of whether they are listed in Section 4.03.

For example, the IRS will look at whether the nonrequesting spouse abused the requesting spouse. The presence of abuse is a factor favoring relief, and a history of abuse by the

nonrequesting spouse may mitigate a requesting spouse’s knowledge or reason to know. The IRS will also consider whether the requesting spouse was in poor mental or physical health at the time he or she signed the return or requested relief. The IRS will consider the nature, extent, and duration of the illness when weighing this factor.

Concluding Thought