Fed Tax-IRS & The Post:"Innocent Spouse Relief"+"Taxing Innocent Spouses"
Please consult your tax advisors for details. Good luck, everyone ;-).
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Innocent Spouse Relief--IRS:
irs.ustreas.gov
irs.ustreas.gov ...Publication 971
ftp.fedworld.gov ...Form 8857, pdf
Taxing Innocent Spouses--The Washington Post:
washingtonpost.com
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FULL TEXT:
>>> Innocent Spouse Questions and Answers
Q. What is joint and several liability?
A. Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.
Q. How can I get relief from joint and several liability?
A. Relief now falls into three categories: Innocent Spouse Relief; Separation of Liability; and Equitable Relief. Each of these kinds of relief have different requirements. They are explained separately below.
Q. What are the rules for Innocent Spouse Relief?
A. To qualify for innocent spouse relief, you must meet all of the following conditions:
...you must have filed a joint return which has an understatement of tax;
...the understatement of tax must be due to erroneous items of your spouse;
...you must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax;
taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax; and
...you must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998.
Q. What are erroneous items?
A. Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not reported on the return.
Q. What is an understatement of tax?
A. An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return. For example, you reported total tax on your 1996 return of $2,500. IRS determined in an audit of your 1996 return that the total tax should be $3,000. You have a $500 understatement of tax.
Q. Will I qualify for innocent spouse relief in any situation where there is an understatement of tax?
A. No. There are many situations in which you may owe tax that is related to your spouse, but not be eligible for innocent spouse relief. For example, you and your spouse file a joint return that reports $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. You are not eligible for innocent spouse relief when you have knowledge of the understatement.
Q. What are the rules for Separation of Liability?
A. Under this type of relief, you divide (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse. The understatement of tax allocated to you is generally the amount of income and deductions attributable to your earnings and assets. To qualify for separate liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857:
...You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
...You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12 month period ending on the date you file Form 8857.
Q. Why would a request for separate liability be denied?
A. Even if you meet the requirements listed above, a request for separate liability will not be granted in the following situations:
...The IRS proves that you and your spouse transferred assets for the main purpose of avoiding payment of tax.
...The IRS proves that at the time you signed your joint return, you had actual knowledge that any items giving rise to the deficiency and allocable to your spouse were incorrect.
Q. What are the rules for Equitable Relief?
A. Equitable relief is only available if you meet all of the following conditions:
...You do not qualify for innocent spouse relief or the separation of liability election.
...the IRS determines that it is unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances.
...Note: unlike innocent spouse relief or separation of liability, if you qualify for equitable relief, you can get relief from an understatement of tax or an underpayment of tax. (An underpayment of tax is an amount properly shown on the return, but not paid.)
Q. How do state community property laws affect my ability to qualify for relief?
A. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, community property laws require you to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to you or your spouse (or former spouse) for purposes of requesting any relief from liability.
Q. How do I request relief?
A. File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. You will need to file Form 8857 for EACH year you are requesting relief.
Q. If I am denied an innocent spouse relief, must I reapply if I believe I might qualify under one of the other two provisions?
A. No. The IRS automatically will consider whether any of the other provisions would apply.
Q. I applied for innocent spouse relief before the law changed (July 22, 1998). Do I need to reapply?
A. No. The Service will consider your request under the new law as long as the liability was unpaid as of July 22, 1998.
Q. When should I file Form 8857?
A. If you are requesting Innocent Spouse Relief, Separation of Liability, or Equitable Relief, file Form 8857 no later than 2 years after the date on which the IRS first began collection activities against you after July 22, 1998.
Q. Where should I file Form 8857?
A. Follow the instructions on Form 8857.
Q. I am currently undergoing an examination of my return. How do I request innocent spouse relief?
A. File Form 8857 with the employee assigned to examine your return.
Q. What if the IRS has levied my account for the tax liability and I decide to request relief?
A. All collection activity is suspended from the date the request is received by the Service until the final determination is made.
Q. What is injured spouse relief?
A. Injured spouse relief is different from innocent spouse relief. When a joint return is filed and the refund is used to pay one spouse's past-due child and/or spousal support, a past-due federal debt, or past-due state income tax, the other spouse may be considered an injured spouse. The injured spouse can claim his/her share of the refund using Form 8379, Injured Spouse Claim and Allocation. To be considered an injured spouse, you must:
...have filed a joint return;
...have received income (such as wages, interest, etc);
...have made tax payments (such as withholding or estimated tax payments);
...have reported the income and tax payments on the joint return; and
...have an overpayment, all or part of which was applied to the past-due amount of the other spouse.
Q. How can I get more information about innocent spouse relief?
A. Call the IRS Tax Forms line at 1-800-829-3676 and request Form 8857 and Publication 971, Innocent Spouse Relief (and Other Relief for Joint filers). <<<
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>>> Taxing 'Innocent Spouses'
By Albert B. Crenshaw
Sunday , September 10, 2000 ; H02
Married couples who file joint returns are treated as a single unit under the tax law. This has a variety of consequences--some good, some bad--but one of the most vexing to both taxpayers and policymakers over the years has been what is known as "joint and several liability."
Joint and several liability means that both spouses are equally and fully liable for all taxes owed by the couple. That makes sense if the couple is to be treated as a single economic unit, and it helps keep couples from playing the system by shifting income and taxes back and forth.
But it has also caused much hardship in cases of divorce or where one spouse was not honest with the other. Tens of thousands of "innocent spouses" over the years have been left holding the tax bag in such situations.
In the 1970s and '80s, Congress made several attempts to enact escape routes for these taxpayers but still left large numbers of them, mostly women, wrestling with the Internal Revenue Service over tax debts run up by a deadbeat spouse or ex-spouse.
Then two years ago, in the Internal Revenue Service Restructuring and Reform Act, the lawmakers installed a new array of innocent-spouse protections. The new law makes it easier for such a spouse to obtain relief if "he or she did not know, and had no reason to know" that the proper taxes were not being paid.
In addition, divorced or separated spouses are allowed to elect to owe only the taxes attributable to their own income, unless they "had actual knowledge" of the "item giving rise to" the underpayment of tax.
Thousands of purportedly innocent spouses and ex-spouses have flocked to take advantage of these new provisions, and many have obtained the relief they sought.
But 10 days ago, a divided U.S. Tax Court punched what could be a significant hole in the new safety net.
In a case involving treatment of withdrawals from retirement accounts, the court ruled that the wife's knowledge that the withdrawals had been made, even without knowledge of their tax consequences, was enough to deny her innocent-spouse relief.
The case involved a Texas couple, David and Kathryn Cheshire, from whom the IRS sought nearly $100,000 in back taxes, interest and penalties. Most of the deficiency resulted from the couple's failure to report most of nearly $200,000 that David Cheshire withdrew in 1992 from his company retirement account and used to pay off a mortgage, buy a new Ford Explorer and start a business.
Kathryn Cheshire asked her husband about the money before signing their return, and he assured her that he had consulted an accountant and that the bulk of the retirement-account withdrawal was not taxable.
The couple subsequently divorced, and thereafter Kathryn Cheshire learned that (a) their 1992 return had not been filed (she found it in a desk and hastily filed it); (b) $8,502 in estimated tax payments had not been made (she borrowed money and paid them); and (c) $131,591 of the retirement-account withdrawals were taxable and had not been reported.
She sought innocent-spouse relief, and the IRS granted it with respect to more than $60,000 of income and disallowed deductions. But the agency denied relief on close to $100,000 in taxes, penalties and interest, related primarily to the retirement withdrawals. She took her case to the Tax Court, seeking relief under several provisions of the new law.
Each of the provisions, though, contains some form of what the court called "a no 'knowledge of the understatement' " requirement, which it determined that Kathryn Cheshire did not meet.
Cheshire conceded that she knew of the retirement-account withdrawals but contended that she met the standard because she did not know that they resulted in an understatement of tax.
But the court, noting that the old law contained a similar standard that had been interpreted as "knowledge of the underlying transaction that produced the omitted income," ruled that knowledge of the tax consequences is not required in the new law either.
Similarly, Cheshire's request for proportionate relief--allocating her ex-husband's income to him and her income to her--was also rejected.
The IRS "maintains that ignorance of the tax law is of no import--if [Cheshire] knew of the event or transaction giving rise to the deficiency (which she admits she did), then [she] cannot obtain relief," the court noted, and it in effect agreed.
"In our opinion, the knowledge requirement . . . does not require the . . . spouse to possess knowledge of the tax consequences arising from the item . . . or that the item reported on the return is incorrect," the majority said.
"Were we to accept the knowledge standard [Cheshire] advocates (i.e., the putative innocent spouse is entitled to relief if she/he misunderstood or lacked knowledge of the Internal Revenue Code), then potentially any spouse who is not a certified public accountant or tax attorney would be allowed to escape paying income tax," the court said.
The court did, however, relieve Cheshire of certain accuracy-related penalties.
Nine of the court's judges agreed with the decision written by Judge Julian I. Jacobs, but four others dissented.
One dissenting judge, John O. Colvin, said the ruling "squarely conflicts with the legislative history" of the provision on proportionate relief and conflicts with another Tax Court ruling earlier this year.
Colvin found the statute to be ambiguous and thus the court may properly turn to the legislative history for interpretation. And "the legislative history consistently shows that Congress intended 'actual knowledge' to be knowledge that the return is incorrect," he said.
He pointed to the Senate Finance Committee report on the bill, which included the statement that "the committee is concerned that taxpayers not be allowed to abuse these rules by knowingly signing false returns," and he noted that several senators used similar language in debate.
Colvin also complained that earlier this year the court granted relief to a taxpayer named Charlton who knew of his then-wife's business though apparently not that its income was being reported incorrectly.
"The majority's failure to discuss Charlton will inevitably cause confusion because, both here and in Charlton, we found that the putative innocent spouse knew of the activity which gave rise to the deficiency," Colvin said.
The Tax Court is not necessarily the final word, as its decisions are appealable to the federal circuit courts of appeals. But several practitioners said the majority ruling is in keeping with past practice and they warned that despite the new law taxpayers should always be very careful about what's reported on their tax returns.
"When two spouses put their names on a joint return it's like two individual returns that got put together," said Arthur Auerbach, a certified public accountant with offices in Vienna. And just as you wouldn't put something you didn't understand on your individual return, you shouldn't let your spouse put something you don't understand on a joint return.
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