This article is part 4 of a series of articles regarding Innocent Spouse. This final blog on the basics of the current Innocent Spouse tax law will do two things: 1) summarize changes discussed in the first three articles; 2) give some practical guidance to attorneys, CPAs, and clients in North Carolina.
Summary of Major Changes
(1) Rev. Proc. 2013-34 was discussed in detail in Part 3 of 4 Parts. The new framework for handling innocent spouse cases is generally very similar to the old one. The changes are incremental, not revolutionary.
(2) The new procedures are much more sensitive to the real-world effects of spousal abuse (domestic violence) and restricted access to financial information than were the previous procedures. One of the major side benefits of the political fight over the statute of limitations was increased awareness in the tax community of the fact that many innocent spouses are unable to comply with tax law due to various forms of fraud and abuse.
(3) The safe harbor formerly applied only to tax underpayment cases. It now applies to tax understatement cases as well. (Keep in mind tax debts may be debts for equitable distribution.)
(4) Financial hardship is now measured against the federal poverty guidelines:
This factor [financial hardship] will weigh in favor of relief if the requesting spouse’s income is below 250% of the Federal poverty guidelines, unless the requesting spouse has assets out of which the requesting spouse can make payments towards the tax liability and still adequately meet the requesting spouse’s reasonable basic living expenses.
If the requesting spouse’s income exceeds 250% of the Federal poverty guidelines, this factor will still weigh in favor of relief, if the requesting spouse’s monthly income exceeds the requesting spouse’s reasonable basic monthly living expenses by $300 or less, unless the requesting spouse has assets, out of which the requesting spouse can make payments towards the tax liability and still adequately meet the requesting spouse’s reasonable basic living expenses.
If the requesting spouse’s income exceeds 250% of the Federal poverty guidelines and monthly income exceeds monthly expenses by more than $300, or if the requesting spouse qualifies under either standard but has sufficient assets to make payments towards the tax liability and still adequately meet the requesting spouse’s reasonable basic living expenses, the Service will consider all facts and circumstances (including the size of the requesting spouse’s household) in determining whether the requesting spouse would suffer economic hardship if relief is not granted. If the requesting spouse is deceased, this factor is neutral.
Rev. Proc. 2013-34, § 4.03(2)(b)
Some Thoughts on Innocent Spouse and the North Carolina Divorce
- Equitable Distribution: Economic fault can be considered as an unequal factor in a divorce. It certainly seems that if one spouse has lied to the IRS about tax issues and created a serious problem, while the other spouse is innocent, the court should equitably take care of the innocent spouse. I know of no published cases in the North Carolina appellate courts where this has happened, however. If there are back taxes, the court has the authority to award these back taxes for payment to the “guilty” party. Be sure to ask.
- Domestic Violence or 50B: A 50B can be a powerful piece of evidence in your innocent spouse case before the Internal Revenue Service, so be sure to submit any 50B you obtained with your application for Innocent Spouse.
Thanks for reading this 4-part blog series on Innocent Spouse and North Carolina law. Check this blog often for updates on Innocent Spouse, as well as North Carolina divorce and family law topics.
By Carolyn J. Woodruff, JD, CPA, CVA