Exception to Lack of Knowledge Requirement (Spousal Abuse)
Prior to discussing the two other provisions, there is an important exception to the lack of knowledge requirement. In fact this exception almost qualifies as a type of relief in itself. This exception is spousal abuse.
The IRS takes this situation into serious consideration and it weighs very heavily in favor of granting relief to the taxpayer. The Internal Revenue Manual, which is the manual used by IRS agents when reviewing innocent spouse claims, states the following:
If a RS (requesting spouse) establishes he or she was the victim of domestic abuse prior to the time the return was signed, but did not sign the return under duress (which might invalidate the joint filing status election), and as a result of the prior abuse did not challenge any of the items on the return for fear of retaliation, the actual knowledge and reason to know requirement of IRC 6015(b) will not apply.
This exception was not necessarily made to punish the abusive spouse, but because of how abuse can affect the power dynamics in a relationship.
The lawmakers wrote this exception with an understanding of how emotional and physical abuse in a relationship can make it difficult, if not impossible, to challenge or question their abuser. As such, they did not want abused spouses to be held responsible for making a decision to not ask questions when a person in a different relationship would likely have felt comfortable doing so.
Innocent Spouse Relief Statute Part D: Equitability
Part D of the innocent spouse relief statute asks whether or not it is fair to hold the taxpayer liable. This consideration is another factor test and is based on the unique facts and circumstances surrounding the taxpayer’s situation. The factors include the following:
Whether a significant benefit was received by the taxpayer (in excess of normal support).
This factor looks at how much the taxpayer benefitted from the income and reporting practices of their spouse.
If the spouse kept the money hidden and separate so the taxpayer didn’t get any use out of the money, then this would be a factor that weighs in favor of getting relief.
If, on the other hand, the spouse was sharing all of his or her income with the taxpayer and the taxpayer was able to live beyond their means because of the spouse’s income and reporting practices, then this factor would weigh against getting relief.
Education level of the taxpayer.
This factor looks at how sophisticated the taxpayer was. A taxpayer with a G.E.D. with English as a second language would be deemed to have a harder time understanding the reporting rules compared to a CPA or a CEO with an MBA.
With this in mind, if you are considered “uneducated,” this factor will weigh in favor of relief, whereas if you are considered to be highly educated, this factor will weigh against relief.
Involvement of the taxpayer in household finances.
The IRS uses this factor to look into how much the taxpayer should have been able to control the proper filing and tax reporting. A taxpayer who had no insight into their family’s total income, had no access to their family’s bank accounts, and relied on an “allowance” would be considered to be not involved in his or her family’s household finances.
On the other hand, a taxpayer who was aware of their family’s total income, had unrestricted access to their bank accounts, and even handled their bookkeeping would be considered heavily involved in their household finances.
The more involved the taxpayer is, the more this factor weighs against relief.
Whether the non-requesting taxpayer deserted the taxpayer.
The considerations and implications of this factor is a bit nuanced. The policy thought behind this factor is to consider taxpayers who were left with nothing while their spouses kept all of the money and benefits of their underreporting.
A straightforward example of this would be when a spouse leaves the country and the taxpayer is left to deal with the spouses’ liabilities. A situation like this would weigh in favor of relief.
- Health of the taxpayer at the time the return was signed and at the time relief was requested.
From a policy standpoint, when a taxpayer has bad health and is dealing with significant health problems, then it is believed that that individual wouldn’t be as aware or concerned about their filing requirements.
This is why the health of the taxpayer is a factor when considering innocent spouse relief. Under this factor, if a taxpayer is suffering from health problems, then this will be favorable for innocent spouse relief.
- Economic hardship of the taxpayer.
This factor is one that will not weigh against the taxpayer. It is a favorable factor if the taxpayer is currently or would experience economic hardship as a result of paying the joint tax liability.
The Internal Revenue Manual has stated that this factor will not weigh against a taxpayer if they would not experience economic hardship or are not already experiencing economic hardship.
- Alleged abuse of taxpayer or whether the taxpayer was subject to financial control of their spouse.
This factor goes back to Part C’s exception. Abuse and financial control are important factors that show whether the taxpayer had the ability to correctly report his or her family’s tax obligations.
Again, this factor goes into the power dynamics within the relationship, if the taxpayer was in a submissive position, then they would not be able to ensure that their spouse was properly reporting their family’s tax obligations.
Whether the taxpayer’s spouse was deceitful toward the taxpayer.
When a spouse is deceitful, then the taxpayer who trusts their spouse could be inequitably held responsible for joint tax liability. Therefore, this factor is meant to consider whether the taxpayer was lied to during their relationship in regard to their financial position and actual income.
It is important to note that the deceit considered is not always limited to financial deceit.
A spouse who has a history of infidelity, for example, is showing a history of not being truthful, and these deceitful tendencies could be used to show that the taxpayer was often lied to; as such, it wouldn’t be unreasonable to think that the taxpayer was also lied to in regards to their spouse’s finances.
An open an honest relationship between the taxpayer and their spouse would weigh against tax relief, and a relationship where the taxpayer has been lied to often would weigh in favor of relief.
Whether the taxpayer received a tax benefit on the return from the understated tax.
Lastly, you must also show that when you signed the return you had no knowledge of the inaccurate filing and that you did not gain a significant benefit from it. This requirement is tricky, because the IRS considers a significant benefit to be any benefit in excess of normal support. The term “normal support” is relative to the taxpayer’s situation.
The no-benefit factor can be difficult to get around. This is because when one spouse is understating their liability, the other spouse usually also receives a financial gain they would not have otherwise received, even if that benefit is indirect.
In other words, an increase in the cash flow to the household could be viewed as a benefit to the spouse requesting release, even if they were unaware of their significant other’s understatement of liability. The IRS will not grant Innocent Spouse Relief in these cases.
Although many of our clients have had success with Innocent Spouse Relief, taxpayers usually have better results working with an attorney to have a partition of the liability written and signed. In doing so, each spouse can protect their assets and minimize exposure to tax liens.
The request for relief must be made within two years from the date of the first collection activity with respect to the RS.
Don’t Give Up on Love, But Consider Filing Separately
The easiest way to avoid unpleasant surprises down the road is to have both spouses file “married, filing separately,” rather than filling out a joint tax return. Of course the deductions are more often less, and for that reason alone, many married couples choose to file jointly. It is hard to say “honey I love you, but I trust my CPA more.”
If you are past that point and are stuck with the tax liability, considering innocent spouse relief is a great option to relieve unfair past tax debt.
Even if you do not think that you qualify for innocent spouse relief after reading this article, we would encourage you to seek the advice of knowledgeable tax professionals before making a final decision. Even if you do not qualify for traditional innocent spouse relief, there may be other options available.
If you have read this far and you are considering legal counsel due to your former spouse leaving you with debt owed to the IRS, call us at (619) 378-3138. For more information about my firm and how we help people like you, visit our website at: www.sambrotman.com.