How Does “Innocent Spouse Relief” Protect Taxpayers From IRS Levies and Collections?

Taxpayers who file joint IRS 1040 tax returns are jointly and severally liable for the full tax liability no matter how much or how little they contribute to the total tax.  That liability is not affected by divorce.  Sure, a divorce court could order one party to pay all or part of the joint tax debt, but such an order does not change the fact that each spouse is jointly and severally liable to the IRS.  The IRS can pursue collections against either or both taxpayers no matter how the divorce court shifts responsibility between the joint filers.

What options are available to an ex-wife if the prior years’ joint tax liability really resulted from extraordinarily large income produced by the ex-husband and the ex-husband now refuses or is unable to pay the taxes? You should consider “innocent spouse relief” offered by the IRS pursuant to 26 U.S.C. §6015?

Tax professional must be able to distinguish between two separate scenarios that may offer “innocent spouse relief” to the ex-wife: one good, and one bad.

The good scenario relates to a situation where a tax return was never filed or the filed return understated the true tax liability.  That scenario causes the IRS to assess a tax for the never filed return or assess a tax deficiency for the understated portion of the tax liability.  Section 6015 of the Internal Revenue Code grants the IRS authority to eliminate the assessed tax deficiency under the “innocent spouse relief” program when the innocent spouse had no knowledge of the understatement and had no reason to know of the understatement.  A perfect example is a wife of a self-employed home-remodeler and the wife has no involvement with the business and no knowledge that the home-remodeler underestimated the tax liability on the joint tax return.

The bad scenario relates to a situation where a tax return was properly filed and did NOT understate the tax liability on the return; the tax liability exists because the taxpayers did not save sufficient funds to pay the tax liability.  That was the scenario in In re Mikels, 524 B.R. 805 (Bankr. S.D. IN 2015).  In Mikels, an ex-spouse applied to the IRS for innocent tax relief for several years.  Some of those years related to years no returns were ever filed, and other years related to years where the innocent spouse failed to pay the taxes that were properly reported on the returns.

The spouse in Mikels sought innocent spouse relief from the IRS before filing bankruptcy.  The IRS granted the innocent spouse relief as to the tax years when no tax return was filed and the IRS had assessed the tax deficiency. However, the IRS denied innocent spouse relief for the tax years that the tax return properly reported the tax liability.

The Mikels spouse filed bankruptcy and objected to the IRS’ proof of claim seeking payment for the properly reported tax liability.  The Mikels court overruled the spouse’s objection and allowed the IRS’ claim for the tax liability relating to the properly reported tax years.  The court ruled that “innocent spouse relief” is only available pursuant to 26 U.S.C. §6015 when the IRS assesses a tax deficiency and such relief is not available when the taxpayers merely fail to pay the tax.

PRACTICE POINTERS: Innocent spouse relief is a great tool for ex-spouses who were deceived by their self-employed ex-spouses who underreported net income and concomitantly underreported the total tax liability.  However, the tax professional must be able to spot when the IRS will grant such relief and when it won’t.  The simple rule is no relief when the tax was reported accurately, and relief may be available it the tax was underreported and the ex-spouse had no knowledge of the underreporting.

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