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Spousal relief: When your client needs relief from joint tax liability

By Claudia Revermann, CPA, J.D.

May 14, 2019

Married taxpayers who file a separate tax return are not liable for the accuracy of their spouse’s returns or for the payment of their spouse’s tax. However, many married taxpayers choose to file a joint tax return because of certain preferences this filing status provides. In this case, both taxpayers are jointly and severally liable for any tax, interest and penalties on the joint return.
 
In certain cases, a spouse may receive relief from joint and several liability after making a request of taxing authorities. Most often people refer to the relief as simply “innocent spouse relief”; however, relief comes in the following three forms and each one is unique and available in only certain circumstances:
  1. Innocent spouse relief. A joint filer, whether currently married or not, may elect to limit his/her liability for unpaid taxes attributable to an understatement arising from erroneous items on a joint return. Erroneous items include failure to report income, improper reporting of income or overstatement of deductions or credits. The individual may not know, and have no reason to know, of an understatement attributable to erroneous items.
  1. Separation of liability relief. With respect to deficiencies of a taxpayer who is no longer married to, is legally separated from or has been living apart for at least 12 months from the person with whom the taxpayer originally filed the joint return, such taxpayers may elect to limit their liability to the portion of the deficiency that is attributable to items specifically allocable to the taxpayer. Items are generally allocated between spouses in the same manner as they would have been allocated had the spouses filed separate returns. The burden of proof as to the allocation of the deficiency is on the taxpayer claiming relief.
  1. Equitable relief. If the previous two forms of relief are either denied or inapplicable, the taxpayer may still request relief based on the facts and circumstances showing it would be inequitable to hold the individual liable for all or part of any unpaid tax or deficiency arising from a joint return. This differs specifically from the other two forms of relief in that it applies to both an understatement of tax and an underpayment of tax. The other types of relief may not be used to create a refund or to direct a refund to a spouse.
Determining factors
The following is a partial list of the positive and negative factors that will be taken into account by the IRS in determining whether to grant full or partial relief to a requesting taxpayer. No single factor is determinative in any particular case. Rather, all factors will be considered and weighed appropriately.
  1. Is the requesting spouse separated (whether legally separated or living apart) or divorced from the nonrequesting spouse?
  1. Was the requesting spouse abused by the nonrequesting spouse, and did such abuse amount to duress? Note that at the request of one spouse, the IRS will omit from shared documents the spouse’s new name, address, employer, telephone number and any other information that would reasonably indicate the other spouse’s location.
  1. Was the legal obligation for payment of the outstanding tax liability allocated to either spouse pursuant to a divorce decree or agreement? If it was allocated to nonrequesting spouse, did the requesting spouse reasonably believe nonrequesting spouse would pay the liability?
  1. Did the requesting spouse know or have reason to know of the item giving rise to a deficiency or that the reported liability would be unpaid at the time the return was signed? Remember, the intentionally ignorant are not protected. If requesting spouse, as a reasonably prudent taxpayer, knew or should have known of an item giving rise to a deficiency, he or she is precluded from receiving innocent spouse relief.
  1. Has the requesting spouse significantly benefited (beyond normal support) from the unpaid liability or items giving rise to the deficiency?
  1. Will the requesting spouse experience economic hardship if relief from the liability is not granted? The determination of a reasonable amount for basic living expenses will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
  1. Has the requesting spouse made a good-faith effort to comply with federal income tax laws in the subsequent tax year(s) to which the request for relief relates? Have spouses appropriately applied for the relief? In addition, if the IRS can show that assets were transferred between the spouses in a fraudulent scheme joined in by both spouses, neither spouse is eligible to make the election.
Making the claim
A spouse may seek relief by filing Form 8857, or other similar statement signed under penalties of perjury. A request for the first two forms of relief must be made within two years of an assessment of additional tax. A request for equitable relief may be made up to the time the IRS can collect the tax (generally 10 years), or if you’re asking for a refund, you have until the later of three years after filing your return or two years after you paid the tax.
 
When the IRS receives an election, or a request for relief, it must send a notice to the nonrequesting spouse’s last known address that informs the nonrequesting spouse of the requesting spouse’s claim for relief. The notice must provide the nonrequesting spouse with an opportunity to submit any information that should be considered in determining whether the requesting spouse should be granted relief from joint and several liability.
 
If relief is denied for the requesting spouse, a taxpayer may appeal the decision. If, at appeals, relief is still denied, the taxpayer may petition the U.S. Tax Court for consideration.
 
Minnesota procedures
Minnesota has its own relief process with its Joint spouse allocation program, pursuant to Minnesota Statute Section 289A.31, subdivision 2. A written request is made to the Minnesota Department of Revenue’s Taxpayer Rights Advocate Office, which includes copies of the joint tax returns (federal and state), the parties’ divorce decree, and any other applicable information to assist the department in allocating the tax liability.
 
Once the request is made, the nonrequesting spouse is notified.  A determination letter will be sent to both parties, who will have 30 days to respond with any additional information for the Department to consider.  Upon final assessment, the Department will update its records for the reallocation of tax liability, if applicable.
 
Taxpayers are not refunded any payments made prior to the request; however, amounts paid in after the request will be refunded after a final determination is made.
 
Be diligent and patient
Spousal relief is known to be one of the more complex types of relief to obtain from the IRS. The process is slow, cumbersome and difficult to navigate. Currently, applications for innocent spouse relief are taking six to 12 months to process. In addition, keep in mind that most often administrative requests are denied because of mistakes made during the filing and because of lack of adequate representation.  Each such case must be carefully analyzed based upon the particular facts and circumstances.
 
Claudia Revermann practices law at her own firm in St. Cloud, MN. She is also a C.P.A. and co-owns a tax resolution firm, Lucent Tax Relief (www.lucenttaxrelief.com). She may be reached at 320-258-9383 and claudia@revermannlaw.com or info@lucenttaxrelief.com.