Neitzer v. Comm’r, T.C. Memo. 2018156, 2018 WL 4519997 (2018)
(a) Facts: Husband owned and operated two businesses. The wife, who was trained as a nurse, was totally disabled after a series of spine and hip surgeries. Her income came primarily from disability benefits.
The couple separated in 2010. Their 2012 joint tax return was prepared by the husband’s business accountant. The wife was notified of the return only two hours before she was expected to sign it. The accountant had been told to disclose nothing to the wife about the husband’s personal or business finances. The wife signed the return without reading it.
The return correctly stated the couple’s tax liability, but the husband refused to fully pay that liability. The unpaid liability was attributable solely to the husband’s income. Morever, the husband changed his mailing address to the IRS to his business, so the IRS’s repeat notices of nonpayment went only to the husband and not to the wife.
After a period of nonpayment, the IRS satisfied the tax debt completely by seizing $21,637.93 from the wife’s bank account.
The divorce court denied the wife’s motion to be reimbursed immediately for the levied funds, but it found the husband in contempt for failing to disclose the unpaid tax debt on a financial disclosure statement. The decree of divorce incorporated a stipulation that awarded the wife $277,000, but it did not expressly require reimbursement for the seized funds.
The wife filed for discretionary innocent spouse relief. The IRS denied relief, and the wife appealed to the Tax Court.
(b) Issue: Was the wife entitled to discretionary innocent spouse relief?
(c) Answer to Issue: Yes.
(d) Summary of Rationale: The IRS agreed that the wife had met the threshold conditions.
The wife’s income was $1,400 per month, and the tax debt at issue was $21,637.93. But the wife was given a divorce settlement of $277,000. The court held that payment of the debt would not cause economic hardship. Therefore, the safe harbor conditions were not met, and the result turned upon the discretionary relief factors.
The wife signed the tax return at issue, and she was charged with knowledge of its contents. But she had no way to know that the husband would not pay the debt. The husband told her little about his finances, and he even told his accountant to tell her nothing. The wife’s lack of knowledge favored relief.
The parties were separated for the tax year in question, so the wife did not benefit from the husband’s nonpayment. She had not filed tax returns since the divorce, but her income was so small that she was not required to file. The wife’s disabled condition also favored relief.
Because essentially all of the factors were favorable to the wife, the court granted discretionary innocent spouse relief and awarded her a refund of the entire amount seized from her account.
It speaks poorly of the IRS that it denied relief in Neitzer. The wife was a classic example of the sort of spouse the drafters of the new innocent spouse procedures had in mind. She was not abused physically, but she was deliberately kept ignorant about financial matters. Not only did the husband tell her nothing and instruct his accountant to tell her nothing, he changed his address so that she would not receive communications from the IRS regarding nonpayment. Finally, the wife was physically disabled and her income was very limited. She received a substantial settlement, but that settlement was effectively her only source of retirement income, and the unpaid taxes were entirely due to the husband’s income. The IRS should not have opposed innocent spouse relief.