This is the second article in a four part series addressing frequently asked questions related to protection from joint and several liability in divorce. We are often asked about the language that a taxpayer’s attorney should include in the divorce decree to protect the taxpayer from joint and several tax liabilities for only their spouse’s conduct. This series is intended to provide taxpayers and practitioners with answers to the most commonly asked questions related to drafting a divorce decree to provide protection from joint and several liability in divorce. Other posts in this series can be found here.
Allocate the Full Obligation to the Responsible Spouse
Although language in the divorce decree allocating the full tax obligation to the responsible spouse cannot prevent the IRS from taking collection action against the non-responsible spouse, the fact that the responsible spouse has the sole legal obligation to pay the outstanding income tax liability in the decree weighs in favor of the IRS granting the requesting spouse relief from the liability. A decree allocating the full responsibility to pay the joint tax obligation to the requesting spouse weighs against granting the requesting spouse relief. If the decree is silent regarding allocation of the tax obligation or states that both spouses are liable, it is neutral in the IRS’s innocent spouse determination.
Let the IRS Requirements for Relief Guide Your Drafting
IRS Publication 971 addresses the requirements for innocent spouse relief and can provide helpful guidance for drafting your client’s proposed divorce decree. There are three types of innocent spouse relief available to a spouse requesting relief under IRC § 6015 (“requesting spouse”): (1) full relief from an understated joint tax liability via traditional innocent spouse relief; (2) full or partial relief from an understated joint tax liability via separation of liability relief; and (3) full or partial relief from an understated or unpaid liability via equitable relief. The drafting attorney should incorporate language addressing all of the elements of innocent spouse relief under each of the provisions in the decree. We identified thirteen of the most relevant items from IRS Publication 971 to address in the decree: six items are addressed below, and the remaining seven items will be addressed in the third article of this series.
- Fraudulent Scheme Between Spouses. The decree should state that the requesting spouse did not participate in a fraudulent scheme or transfer any assets as a part of a fraudulent scheme.
- Disqualified Assets. A “disqualified asset” is an asset that was transferred between spouses for the purposes of avoiding tax. The decree should include a statement that no assets were transferred between spouses for the purposes of avoiding tax or the payment of tax.
- Fraudulent Intent. State in the decree that the requesting spouse did not file or fail to file the return with fraudulent intent
- Attribution. In general, innocent spouse relief is only available to the extent the income items, erroneous deductions, or tax liabilities on the tax return(s) in question are attributable to the non-requesting spouse. Include a statement that the income, erroneous deductions, or tax liabilities are attributable to the non-requesting spouse. When applicable, the decree should specifically list the income or erroneous deductions that gave rise to the obligation.
- Prior Abuse. When the income or erroneous deductions are attributable to the requesting spouse, the IRS will still consider granting innocent spouse relief if the requesting spouse establishes that he or she was abused prior to the time the return was signed, and, as a result of the prior abuse, the requesting spouse did not challenge the treatment of any items on the return for fear of the non-requesting spouse’s retaliation. When applicable, include the facts that establish prior abuse and fear of retaliation in the decree.
- Actual Knowledge: Underpayment Cases. An underpayment case is a case in which the tax return was correctly filed, but the taxes were not paid in full. The requesting spouse must establish that it was reasonable for him or her to believe that the non-requesting spouse would pay the reported income tax liability. The requesting spouse has a duty to approach the non-requesting spouse and inquire about how the taxes will be paid. The decree should include the facts and circumstances surrounding all communications between the spouses about how the taxes would be paid and how the non-requesting spouse responded to these communications.
Please check back in the weeks and months ahead for posts detailing the remaining seven items we have identified from IRS Publication 971 to include when drafting language regarding responsibility for taxes in a divorce decree, as well as additional factors to keep in mind to successfully obtain innocent spouse relief.