Getting divorced is hard to begin with, but can be even more difficult when tax debts are owed to the Internal Revenue Service arising from jointly filed income tax returns. Frequently, one spouse will allege that he or she is an “innocent spouse” and should not be held liable for the community tax debt. Innocent spouse relief is most commonly granted to a joint filer who did not know, and had no reason to know, the tax return had an understatement of tax. Under Section 6015(f) of the Internal Revenue Code, a spouse who was aware of an underpayment of tax on a jointly filed return may be eligible for relief if taking into account all the facts and circumstances, it would be inequitable to hold the requesting spouse liable for some or all of the unpaid tax or deficiency.
Factors weighing in favor of relief include marital status (if the couple is no longer married); economic hardship (if satisfaction of the tax liability in whole or in part causes the requesting spouse to be unable to pay reasonable basic living expenses); and lack of knowledge or reason to know the taxes would not be paid with the tax return or within a reasonable period of time after the filing of the return.
Other factors evaluated in an innocent spouse request include whether or not there was abuse, any legal obligations to pay the outstanding tax liability (such as a divorce decree), whether the requesting spouse significantly benefited from the unpaid tax (for example if the requesting spouse received luxury vacations, jewelry or cars at the time the taxes were not paid), compliance with income tax laws (has the requesting spouse paid income taxes on their own earnings in the years at issue and subsequent years), and the mental or physical health of the requesting spouse.
Clients who may have an innocent spouse claim should work with an experienced tax professional early on to ensure claims are properly substantiated and timely filed on the correct forms. All factors are not weighed equally, so making a persuasive case for relief from the beginning is important.
For more information, please contact Giselle Alexander in the Phoenix office at (602) 285-5046, or another attorney in the DW Tax practice group.