When married taxpayers elect to file a “Married Filing Joint” tax return, both taxpayers are responsible for the accuracy of the income and other items reported on the tax return. So, what happens if a taxpayer who filed a joint return is later in a situation where there is tax owing, but the tax is attributed to only one of the spouses?
Congress enacted section 6015 of the Internal Revenue Code to allow for three types of relief from joint tax obligations: Innocent Spouse, Separation of Liability, and Equitable Relief. To review all of the factors the Internal Revenue Service (IRS) considers for each type of relief pursuant to section 6015, please visit http://www.irs.gov/pub/irs-pdf/p971.pdf A copy of Form 12510, Questionnaire for Requesting Spouse, which the IRS uses to help determine eligibility for relief, is available at http://www.irs.gov/pub/irs-pdf/f12510.pdf
Among the factors the IRS considers when determining a spouse’s eligibility for relief is whether he or she actually knew or should have known of the facts and circumstances which gave rise to the tax obligation. The IRS test for determining whether a spouse actually knew is different from the test for determining whether a taxpayer should have known.
To evaluate actual knowledge, the IRS will examine whether the innocent spouse knew that he or she omitted income or took a baseless deduction on his or her income tax return. In cases where taxpayers filed their return correctly, but did not pay the obligation, the IRS will examine whether a spouse had a reasonable belief that his or her spouse would pay the tax.
When determining whether a spouse should have known, the IRS considers: a spouse’s education and background, his or her involvement in household financial affairs, whether the spouse purchased lavish or unusual items, and the evasiveness or deceit of the other spouse or ex-spouse.
The IRS will often deny relief if it determines a spouse knew or should have known of the events which gave rise to a tax obligation. Simply having knowledge of these events, however, does not necessarily disqualify a spouse from relief. For example, in Reser v. Comm’r, 112 F.3d 1258, (5th Cir. 1997), the husband created a corporation for the purpose of acquiring a shopping mall. The wife was not involved in the activities of the corporation, although she had advanced some of her personal funds to her husband to invest in his corporation. The couple filed a joint tax return for that year. She was the sole earner of the income reported on the return. Later, the IRS disallowed some of the corporate deductions the husband reported on the couple’s joint income tax return. The Court held that, in spite of the wife’s actual knowledge of the events giving rise to disallowed deductions and her contribution of capital to his business, she was not responsible for the tax because she was not personally involved in her husband’s business affairs.
The decision in Reser demonstrates that a taxpayer, even when having knowledge of the events giving rise to the obligation, can still qualify for Innocent Spouse, Separation of Liability, or Equitable Relief when the other criteria are met.