Articles Posted in Innocent Spouse

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Dear Carolyn:

I think my husband and I may be getting separated and divorced, and I am concerned about our 2016 tax return, which has not been filed yet. The tax return is under an extension.  My husband has a small business in Greensboro, and I have no idea if he reports all of the income in the business.   I have heard that I can be responsible if I sign the return.  He never gives me a copy.  Do you have any thoughts on this issue?  Do I have to worry?

Worried and in the Dark

Dear Worried and in the Dark:

This is always a tough decision, and the law that applies to this is called:  “Innocent Spouse Relief.”  There are some things that you need to know in making the critical decision of whether to file a joint income tax return with your spouse.

First, you need to know that you do not have to sign a joint return, but if you elect to do so, you are potentially 100 percent liable for any income taxes, interest or penalties related to the return you sign.  Yes, I said 100 percent, not 50 percent.  You see, the Internal Revenue Code holds each signer of a tax return jointly and severally liable for all taxes, interest and penalties, absent a co-signer being an innocent spouse. So, to me, signing a joint tax return is always a big decision for a person with a small business.  Contrast this with spouses who both have W-2 incomes from employment with third parties;  if the only income on the return is W-2 income, then generally it is safe to sign a joint return properly prepared.  You, however, are in the riskier situation with the small business.

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Hiramanek v. Comm’r, T.C. Memo. 2016-92, 2016 WL 2763870 (2016)

Facts: The husband prepared a joint tax return for tax year 2006 and asked the wife to sign it. She refused to sign without reading it, and he permitted her to take a quick glance at the return. She noticed that the return contained a $35,000 casualty loss deduction for a break-in to the couple’s car while they were on vacation in Hawaii. Believing the deduction overstated, she refused to sign. The husband threatened and physically abused her for several hours, and she finally made a scribble on the signature line. The husband’s physical abuse was consistent with other physical abuse which the wife endured during the marriage.

The next day, the husband presented the wife with a new report with the $35,000 deduction omitted. The wife, fearful of further abuse, signed the return.

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Hardin v. Comm’r, T.C. Memo. 2016-141, 2016 WL 4006806 (2016)

Facts: Husband and wife were married in During the marriage, the husband was partner in a law firm, and he also ran a sports management business. The wife was owner and president of a financial planning company. The husband was not involved with the operation of the wife’s business.

For 2009 and 2010, the parties filed joint tax returns.

Husband and wife were divorced in Missouri in 2011. Their divorce decree incorporated the settlement agreement, which gave each party all of the assets and liabilities of their respective businesses, and required each party to hold the other harmless from all business debts. There is no suggestion that the wife claimed any form of abuse in the divorce case.

The IRS examined the 2009 and 2010 returns, and found deficiencies. Some of these deficiencies arose from the husband’s law firm, and some arose from the wife’s financial planning business. Each party filed a petition for innocent spouse relief. The IRS agreed that each party was entitled to relief from liability for tax problems attributable to the other’s business.

The wife then filed an additional petition for innocent spouse relief from taxes attributable to her own business. In this petition, she argued for the first time that she was abused by the husband.

Issue: Is the wife entitled to innocent spouse relief from taxes arising from operation of her own business?

Answer to Issue: No

Summary of Rationale: The only issue before the court was discretionary innocent spouse relief under 6015(f). The seventh threshold condition normally requires proof that the tax liability is attributable at least in part to property or income of the nonrequesting spouse. The taxes at issue were on the wife’s business, so the seventh condition was facially not met. Continue reading →

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Hollimon v. Comm’r, T.C. Memo. 2015-157, 2015 WL 4747779 (2015)

(a) Facts: During their marriage, the parties established and worked for a business providing temporary staffing to hospitals. The wife testified that the husband ran the business and she was an employee. The husband testified that the parties ran the business together.

“Unfortunately, Ms. Hollimon and Mr. Al Bakari’s relationship has been rife with abuse. The abuse has not been one sided; it has been perpetrated by both parties, and each of them has requested restraining orders against the other at various times.” 2015 WL 4747779, at *1.

The business was run out of the parties’ home. On their joint tax return for 2009, the parties claimed a credit for business use of their home. The wife testified that the husband prepared the return, and that she was scared to question it because of the risk of abuse. The husband testified that both parties prepared the return.

The IRS disallowed a portion of the credit for the business use of the parties’ home and assessed a deficiency. The wife filed Form 8857, seeking discretionary innocent spouse relief. The IRS denied relief and the wife appealed to the Tax Court. The Ihttps://www.woodrufflawfirm.com/domestic-violence.htmlRS conceded that the wife was entitled to relief, but the husband intervened and opposed relief.

(b) Issue: Was the wife entitled to discretionary innocent spouse relief?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The wife met all threshold conditions except the last one, whether the tax at issue was attributable to income of the nonrequesting spouse. It was disputed whether the business income was attributable to the wife. But the court held that the dispute did not matter, because abuse is a recognized exception to the last condition, and abuse was present on the facts:

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Sapp v. Comm’r, T.C. Memo. 2015-143, 2015 WL 4639260 (2015)

(a) Facts: The IRS assessed deficiencies on a husband and wife’s joint income tax returns for 2004, 2006, and 2008. The parties appealed to the Tax Court, and the wife sought both mandatory and discretionary innocent spouse relief. The IRS conceded that relief was appropriate, but the husband argued otherwise.

The tax at issue arose from the husband’s plumbing business, for which the wife served as bookkeeper. There was a history of domestic abuse in the marriage going back to 2002. The parties had been separated multiple times, and the wife spent time living in a domestic violence shelter.

At the time of the Tax Court hearing the parties were separated but not yet divorced. The wife had little income and was receiving food stamps.

(b) Issue: Was the wife entitled to innocent spouse relief?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: Because the wife served as bookkeeper for the business, she knew of the tax matters at issue, and she was not eligible for mandatory innocent spouse relief.

For discretionary innocent spouse relief, there is an exception to the knowledge requirement in cases of abuse. The court summarily held that abuse was present, so the threshold conditions were met.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Agudelo v. Comm’r, T.C. Memo. 2015-124, 2015 WL 4086310 (2015)

(a) Facts: A husband and wife filed a joint tax return for tax year 2010. The return did not report as income certain unemployment benefits received by the husband. The IRS discovered this fact and assessed a deficiency.

The husband filed a request for innocent spouse relief. In support of that request, he testified that the wife had taken the benefit checks without his knowledge. The wife intervened and testified that she never opened the husband’s mail for him. By the time of trial, the parties were separated, though not yet divorced.

(b) Issue: Was the husband entitled to innocent spouse relief?

(c) Answer to Issue: No.

(d) Summary of Rationale: One of the threshold conditions for innocent spouse relief is proof that the tax at issue is based upon the nonrequesting spouse’s income. The tax at issue here was based upon the husband’s own income.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Palomoares v. Comm’r, T.C. Memo. 2014-243, 2014 WL 6778542 (2014)

(a) Facts: A husband and wife lived in Washington State. The wife was not fluent in English and mostly spoke Spanish.

The parties separated in 2005, and the wife filed sole tax returns for 2006 and 2007, claiming refunds. The IRS rejected the wife’s claims, as it seized the amount of her refunds to satisfy unpaid tax liability from the parties’ joint 1996 tax return.

When the wife did not receive the refunds, a legal clinic helped her to file Form 8379, Injured Spousal Allocation, which is aimed at allocation of liability on a joint tax return by an injured spouse.  The IRS rejected the form, informing the wife by letter that she needed to file Form 8857 to seek innocent spouse relief. The wife did not do this, but she barely spoke English and could not understand the letter.

Throughout this period, the wife was abused physically by the husband, her father in Mexico was seriously ill, and her wages were garnished because of the husband’s business activities. These problems caused the wife to suffer from depression, which was treated with medication.

The parties were divorced in 2010. The wife’s divorce attorney learned that the wife’s 2006 and 2007 refunds had been applied to the 1996 liability. With her attorney’s help, she finally filed Form 8857, seeking innocent spouse relief.

The IRS initially indicated an intent to deny the wife’s claim under its former policy regarding the two-year statute of limitations. After the IRS’s policy changed, it did not do this. Instead, it granted innocent spouse relief, but only with regard to payments made within two years of the filing of Form 8857. The wife appealed to the Tax Court, arguing that she should obtain relief retroactive to her filing of Form 8379.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Johnson v. Comm’r, T.C. Memo. 2014-240, 2014 WL 6676824 (2014)

(a) Facts: During her marriage, the wife owned and operated a dental practice. The parties filed a joint tax return in 2007, which correctly reported the tax due, but the parties had financial problems and were not able to pay the tax.

In 2010, the parties were divorced in California. Their settlement agreement provided that they would share tax debts equally.

The wife suffered from bipolar disorder, which she was able to manage successfully with medication.

The wife filed a request for innocent spouse relief from the 2007 tax liability. The IRS denied that request, and the wife appealed to the Tax Court. The husband intervened to oppose relief.

(b) Issue: Was the wife entitled to innocent spouse relief?

(c) Answer to Issue: No.

(d) Summary of Rationale: The last of the seven threshold conditions for granting innocent spouse relief provides that the tax at issue must be based upon the income of the nonrequesting spouse. That condition was not met; the tax was attributable to the income from the wife’s dental practice.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Observations:

  1. If the Tax Court asks for briefs, it is probably a good idea to file

 

  1. The husband’s attempt to argue duress was Duress occurs when consent is obtained through improper threats. The husband was in contempt of the state court divorce decree for various acts of noncompliance, including nonpayment of the very taxes at issue. The state court had every right to insist that he comply with the settlement agreement, as incorporated into the decree. There were no improper threats.
  1. The court’s statement that the wife “could . . . write checks for personal expenses but needed permission from intervenor to make purchases,” 2014 WL 6645592, at *3, is a little A check written for personal expenses is often a purchase, so this statement was ambiguous. Since the account was in the name of the husband’s business, the author assumes that the wife’s control over the account was limited. But she might have had considerable control if the definition of “personal expenses” was sufficiently broad. This point is not addressed in the opinion.
  1. The court’s finding that the wife had reason to know of the tax problem is troubling.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Demeter v. Comm’r, T.C. Memo. 2014-238, 2014 WL 6645592 (2014)

(a) Facts: A husband and wife were  married. During the marriage, the husband started a business, Sunshine Framing and Finishing (“Sunshine”). The wife was added as a vice president in 2008. She ran errands for the company and helped with its bookkeeping, but did not receive a salary. Sunshine’s bank account was used for personal expenses as well as business expenses; the parties had no individual bank accounts.

The husband retained an attorney to file the parties’ joint tax returns for 2004, 2005, and 2006, which were filed late in 2008. The wife never met the attorney, and signed the returns without reading them.

The returns reported tax due, which the husband did not pay. The wife was not aware that tax was due until the IRS began collection proceedings. She confronted the husband about the tax debts, and he promised to pay them. The parties eventually filed bankruptcy.

Shortly before the end of the bankruptcy case, the parties were divorced in Florida. The divorce decree incorporated a separation agreement, in which the husband agreed to pay all outstanding tax debt.

The husband failed to comply with the agreement, and was held in contempt by a Florida court. As part of the contempt proceedings, he signed an Affidavit For IRS Innocent Spouse Determination, reaffirming that he was responsible for all back taxes.

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