Divorcee Seeks Tax Relief under Innocent Spouse Rules

Roxanne and Steve were married for about five years and things didn’t go well. About six months after their divorce, Roxanne received an IRS notice in the mail. Apparently, her ex-husband had failed to report thousands of dollars in income and the two owed the federal government a substantial sum in back taxes, interest and penalties. This was the last thing Roxanne needed as she tried to rebuild her life. So she visited her financial advisor to determine what recourse she might have.

Roxanne’s advisor assured her that this wasn’t an open and shut case in the IRS’s favor: Her recourse could be found under Section 6015 of the IRS Restructuring and Reform Act of 1998, better known as the “innocent spouse rules.”

Various conditions

According to these rules, applicants may qualify for either general, separate liability or equitable relief if they can meet the applicable IRS conditions. (Her advisor promised to explain further at a follow-up meeting.)

Conditions include whether the applicant received any significant direct or indirect benefit from the tax understatement. For instance, Roxanne’s case could be weakened if she’d used unreported income to pay extraordinary household expenses.

The agency will also look at the distinctive personal aspects of her case. The fact that she has divorced her husband is significant. Whether she was abused physically or mentally by her former spouse will also play a role, as will whether she was in poor mental or physical health when the return(s) in question was signed.

In addition, the agency will consider whether Roxanne would experience economic hardship without relief from this significant tax debt.

Important development

There has been an important recent development in the innocent spouse rules. Previously, applicants had to file for relief within a two-year period following receipt of a collection notice. This deadline has impeded many taxpayers from obtaining relief because their irresponsible spouse got to the notice first.

Last summer, the IRS announced that it was abolishing this deadline for applicants who file under the equitable relief provision of the innocent spouse rules. The change also applies to cases that are currently pending with the IRS. And taxpayers who were previously denied relief under the deadline may reapply.

Not easy

Roxanne’s financial advisor warned her that winning relief under the innocent spouse rules isn’t easy. The IRS grants fewer than half of the approximately 50,000 applications it receives annually, according to financial educators SmartPros. But he assured her he’d work hard to ensure she wouldn’t have to pay for her ex-husband’s misdoings.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

related links