Tax Controversy & Resolution: Relief from Joint & Several Liability (married taxpayers joint returns)

Three Types of Relief 

(1) Innocent Spouse Relief IRC §6015(b)

Innocent Spouse Relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.​​ If the actions of your spouse created the tax liability and you were unaware, or did not participate in those actions, you can use the IRS Form 8857 to request tax resolution called “innocent spouse relief” and have the tax debt and penalties removed.

You must meet all of the following conditions to qualify for Innocent Spouse Relief.

(1) You filed a joint return that has an understatement of tax that's solely attributable to your spouse's erroneous item. An erroneous item includes income received by your spouse but omitted from the joint return. Deductions, credits, and property basis are also erroneous items if they're incorrectly reported on the joint return.

(2) You 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. 

(3) Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. Indications of Unfairness for Innocent Spouse Relief (Examples of factors the IRS will consider) include:

  • Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax.

    • Significant benefit. A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances. Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax.​

    • Example.You receive money from your spouse that is beyond normal support. The money can be traced to your spouse's lottery winnings that were not reported on your joint return. You will be considered to have received a significant benefit from that income. This is true even if your spouse gives you the money several years after he or she received it.

  • Whether your spouse (or former spouse) deserted you.

  • Whether you and your spouse have been divorced or separated.

  • Whether you received a benefit on the return from the understated tax.

​(4) You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

See Publication 971 (10/2014), Innocent Spouse Relief for additional background details.

Generally taxpayers must file Form 8857 no later than 2 years after the first IRS attempt to collect the tax from you that occurs after July 22, 1998. However, there are exceptions for "Equitable Relief" and "Relief Based on Community Property Laws" based on different filing deadlines that may also apply.  

 

Examples of collection activity starting the two-year statute of limitations that cover the filing of Form 8857 include:  

  1. IRS sends a notice under IRC 6330 of the Service’s intent to levy and of the taxpayer’s right to a collection due process (CDP) hearing,

  2. IRS offsets a refund from another tax year and you received a notice advising you of your rights under IRC 6015, or

  3. IRS files a judicial suit or claim that puts the requesting spouse on notice the IRS intends to collect the joint tax liability from specific property belonging to that spouse. For further information on collection activity, see Treas. Reg. § 1.6015-5(b)(2).

(2) Relief by Separation of Liability  §6015(c)

Under this type of relief, you allocate (divide) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse) you're legally separated from or not living with, when an item wasn't reported properly on a joint return. You're then responsible for the amount of tax allocated to you.

This type of relief is available only for unpaid liabilities resulting from understatements of tax. Refunds are NOT allowed.​​

Requirements for Relief

To request relief by separation of 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.

Limitations on Relief

Even if you meet the requirements discussed previously, a request for Relief by Separation of Liability will not be granted in the following situations.

  • The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

  • The IRS proves that at the time you signed your joint return, you had actual knowledge of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). Refer to Innocent Spouse Relief for more information about erroneous items.

  • Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. See Transfers of Property to Avoid Tax.

(3) Equitable Relief §6015(f) 

If you do not qualify for Innocent Spouse Relief, Relief by Separation of Liability, or Relief from Liability Arising from Community Property Law, you may still be relieved of responsibility for tax, interest, and penalties through Equitable Relief.

To qualify for Equitable Relief, you must establish that under all the facts and circumstances, it would be unfair to hold you liable for the deficiency or underpayment of tax. In addition, you must meet the other requirements listed in Publication 971, Innocent Spouse Relief. See Revenue Procedure 2013-34 for information about how the IRS will take into account abuse and financial control by the non-requesting spouse in determining whether Equitable Relief is warranted.

If you request any of these types of relief stated above, and the IRS determines you do not qualify for any of them, the IRS will consider whether Equitable Relief is appropriate.  For Equitable Relief, you must request relief during the period of time the IRS can collect the tax from you.

Unlike Innocent Spouse Relief or Separation of Liability, you can get Equitable Relief from an understatement of tax or an underpayment of tax.

  • Underpayment of Tax. An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2017 return shows that you and your spouse owed $10,000. You pay $4,000 with the return. You have an underpayment of $6,000.

  • Understatement of Tax. 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.

Conditions for Getting Equitable Relief

You may qualify for equitable relief if you meet ALL of the following conditions.

(1) You are not eligible for Innocent Spouse Relief, Relief by Separation of Liability, or Relief from Liability Arising from Community Property Law.

(2) You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme.

  • A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

(3) Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax.

(4) You did not file or fail to file your return with the intent to commit fraud.

(5) You did not pay the tax.

  • However, see Refunds, below, for situations in which you are entitled to a refund of payments you made.

(6) You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. The following are examples of factors that may be relevant to whether the IRS will grant Equitable Relief:

  • Whether you are separated (whether legally or not) or divorced from your spouse.

    • A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return.

  • Whether you would suffer a significant economic hardship if relief is not granted. (e.g., not being able to pay your reasonable basic living expenses).

  • Whether your former spouse has a legal obligation under a divorce decree or agreement to pay the tax.

    • This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability.

  • Whether you received a Significant Benefit (beyond normal support) from the unpaid tax or item causing the understatement of tax. (For a definition of Significant Benefit, see Indications of Unfairness for Innocent Spouse Relief in Pub 971).

  • Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years.

  • Whether you knew or had reason to know about the items causing the understatement or that the tax would not be paid, as explained next.

(7) The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, UNLESS one of the following exceptions applies:

  • The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.

  • If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.

  • You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).

  • You establish that you were the victim of abuse before signing the return and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.

  • You established that your spouse's (or former spouse's) fraud is the reason for the erroneous item causing the understatement of tax.

Form 8857 Filing Deadline Exception for Equitable Relief.

On July 25, 2011, the IRS issued Notice 2011-70 expanding the amount of time to request Equitable Relief. The amount of time to request Equitable Relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both:

  • Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. In certain situations, the 10-year period is suspended.

  • Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. See Pub. 556, for details.

  • Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability.

Need more details? Contact us

We are here to assist. Contact us by phone, email or via our social media channels.