Published on:

Requirements for Discretionary Innocent Spouse Relief : Part 3 of 4 Parts

Part 3 of a 4-Part Series on Innocent Spouse Basics

(a) The Former Requirements: Rev. Proc. 2003-61, 2003‑32 I.R.B. 296, 2003 WL 21708514 (Aug. 11, 2003)

(b) The New Requirements: Rev. Proc. 2013-34, 2013‑43 I.R.B. 397, 2013 WL 5179241 (Oct. 21, 2013)

(1) This is the new Revenue Procedure setting forth the new IRS framework for considering requests for discretionary innocent spouse relief.

(2) Revenue Procedure 2013-34 supersedes Revenue Procedure 2003-61 in cases in which the former ruling applies—presumably cases decided after October 21, 2013.

(3) Conditions For Eligibility.  A spouse is eligible for discretionary relief only if all of the following factors are met: (1) the requesting spouse filed a joint tax return; (2) mandatory innocent spouse relief under § 6015(b) or (c) is not available; (3) the claim for relief is timely filed; (4) the spouses did not transfer assets between themselves in a fraudulent scheme  (for example, in equitable distribution); (5) the spouse not requesting relief did not transfer certain disqualified assets to the requesting spouse (generally any asset transferred for the purposes of avoiding taxes); (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) the tax liability at issue is attributable at least in part to property or income of the nonrequesting spouse.

Comment: The core of these requirements is that innocent spouse relief will be denied if (1) the requesting spouse was engaged in a scheme to avoid taxes or commit fraud, or (2) the tax problem arises from the requesting spouse’s own income or property.  It is a rare case where these factors disqualify the owning spouse from receiving relief.

(4) The “Safe Harbor” Provision.  A request for discretionary innocent spouse relief under § 6015(f) will ordinarily be granted if (1) the parties are divorced or legally separated, or were physically separated for 12 months before the filing of the request for relief; (2) if relief is denied, the spouse seeking relief would suffer economic hardship, and (3) the spouse seeking relief had no reason to know of an understatement or deficiency, or did not have reason to know that the other spouse was unable to pay tax that was correctly reported.

Factor 3 is deemed satisfied even if the requesting spouse did have reason to know, if the requesting spouse was not able to challenge the joint return due to the other spouse’s (a) abuse, or (b) restricted disclosure of financial information.

(5) The Discretionary Factors.  If the safe harbor provision does not apply, the IRS will consider the following factors: (1) whether the spouse seeking relief is divorced or legally separated from the other spouse; (2) whether the spouse seeking relief will suffer economic hardship if relief is denied; (3) whether the spouse seeking relief had reason to know of the tax problem (unless the requesting spouse was a victim of abuse); (4) whether the other spouse had a duty to pay the taxes at issue under a divorce decree or settlement agreement; (5) whether the spouse seeking relief received significant benefits from nonpayment of taxes; (6) whether the spouse seeking relief complied with tax law in future tax years, and (7) whether the requesting spouse was in poor physical or mental health.

For more information on the topic of innocent spouse, see the other parts of this 4-part series, as well as this blog, for updates and developments regarding innocent spouse.

by Carolyn J. Woodruff, JD, CPA, CVA