Breaking News

Treasury Secretary Yellen Addresses Global Minimum Tax Treatment of the U.S. Federal-Level R&D Tax Credit Program

Peter J. Scalise

On March 21st, Treasury Secretary Janet Yellen indicated that she was optimistic that the U.S. would be able to maintain the value of its Federal-Level R&D Tax Credit Program that was originally introduced into the U.S. Internal Revenue Code under President Reagan’s Economic Recovery Tax Act of 1981 for companies...

MORE

Marital Dissolution Planning and Crowdfunding

Divorce Taxation

Sidney Kess, CPA, J.D., LL.M.

When couples split up, it’s still common for one party to make support payments to the other. Sometimes this continues until the death of the party receiving support; sometimes it...

MORE

The Bottom Line

Tax Strategies

Marital Dissolution Planning Post TCJA

Sidney Kess, CPA, J.D., LL.M.

The IRS reports that nearly 600,000 taxpayers claimed an alimony deduction on their 2015 returns (the most recent year for statistics) (https://www.irs.gov/pub/irs-soi/soi-a-inpd-id1703.pdf). The Tax Cuts and Jobs Act of 2017...

MORE

Feature Stories

Tax Court Upholds Strict Adherence to Requirements for IRS P…

Kathleen M. Lach

A recent decision issued by the U.S. Tax Court in Graev v. Commissioner 1 could prove pivotal in cases where a practitioner has requested abatement of penalties for their client...

MORE

Financial Planner

Understanding Pay Options with the new DOL Regulations

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

This article is a follow up to the prior article which highlights the new regulations for the Fair Labor Standards Act (FLSA) from the Department of Labor (DOL) raising the...

MORE

Client Tax Tip

How Interest Can Be Deducted When Money is Borrowed to Buy I…

Julie Welch, CPA, CFP

If a taxpayer borrows money to purchase investments, such as mutual funds, bonds or stock, the interest paid on the loan can usually be deducted. There are two limitations, however...

MORE

Editor Blog

CPAs Wanting to Do It Themselves

Joshua Fluegel

In its ongoing effort to stay on the forefront of developments in tax profession technology, CPA Magazine talks to Mark Strassman, president of Make My Day CPA. Strassman discusses CPAs’...

MORE

Tax Checklist

Non-Grantor Trust Planning Tips Benefit Many Clients

Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

Why You Must Understand the New Planning Benefits of Non-Grantor Trusts The 2017 Tax Act dramatically changed tax planning. In the new tax environment, there are a number of significant income...

MORE

mug lach kathleenThe decision as to whether to file a joint federal income tax return with one's spouse is not one to be taken lightly. Yet, it is a decision that is frequently made without sufficient consideration, and the consequences can be devastating for the unsuspecting spouse.

Case No.1: John is a self-employed consultant, and in 1991 married Lisa Sudby. By August of 1993, Lisa and John separated, and in October of 1993, Lisa filed for divorce. The divorce was finalized by June of 1994. The couple filed joint federal income tax returns for 1991, 1992, and 1993. John was audited by the IRS. This resulted in adjustments to income for John's business and ultimately adjusted the couple's joint federal income tax obligation. Lisa was jointly and severally liable for the additions to tax and attendant penalties assessed as a result of the audit, with ex-husband John for years 1992 and 1993 since they filed joint returns for those years.

[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]

Case No. 2: Bob is an investment banker. His wife Patty is a stay-at-home mom. Bob’s business involves multimillion-dollar transactions, and his balance sheet reflected deposits or withdrawals in any given day that fluctuated by hundreds of thousands of dollars. Patty has no understanding of or interest in investment banking.

Bob and Patty have filed joint federal income tax returns since they were married. Patty signs the returns each year prior to filing, without review.

In 2001, Bob received notice that the IRS was opening an examination of a transaction he engaged in at the advice of a colleague at the time. Sometime in 2003, the auditor determined that the transaction at issue was a sham. Two of the promoters of the transaction faced prison time. Bob and Patty faced an increase of $1.2 million in tax to their 1998 federal income tax return, plus penalties and interest.

The Internal Revenue Code provides relief from joint and several liability under certain circumstances pursuant to IRC §6015. Section 6015(b) is frequently referred to as the “innocent spouse” provision. Section 6015(c) provides for separation of liability, and takes into consideration the allocable income of each spouse on the jointly filed return. Finally, section 6015(f) provides relief under considerations of fairness or "equity."

Section 6015(b) provides relief for all joint filers who satisfy the five requirements listed in that section. A taxpayer must satisfy all of the requirements of subparagraphs (A) through (E) to be entitled to relief under section 6015(b)(1).1 Section 6015(c) allows a spouse who filed a joint tax return to elect to limit his/her income tax liability for that year to his/her separate liability amount. However, section 6015(c) applies only to taxpayers who are no longer married, are legally separated, or have not lived together over a twelve-month period. A taxpayer may also seek relief under section 6015(f), which authorizes the Service to grant equitable relief from joint and several liability when relief is unavailable under section 6015(b) and (c).

Except for the knowledge requirement of section 6015(c)(3)(C) (the provision disallowing election of separate liability to a spouse with actual knowledge of the item giving rise to the deficiency), the taxpayer bears the burden of proving that he/she has met all the prerequisites for innocent spouse relief.2

1. IRC §6015(b)

IRC §6015(b) lists the conditions that must be satisfied in order for relief to be considered. If each condition is met, the requesting spouse is relieved of the tax liability for that year to the extent the liability is attributable to the understatement.3

The code section also provides for apportionment of relief. If the requesting spouse establishes that he or she did not know about a portion of the understatement, relief may be granted to the extent that the liability is attributable to that portion of the understatement.4 Relief under this code section is available only in audit situations, where as a result of an IRS examination of a return, it determined that there was an "understatement" of tax for the tax year under examination.

2. IRC §6015(c)

IRC § 6015(c) provides relief for taxpayers who are no longer married or who are legally separated or not living together. If relief is available under this section, the individual's liability for any deficiency assessed for the return at issue will not exceed the portion of the deficiency allocable to the individual.5 The requesting spouse has the burden of proof in establishing the portion of any deficiency allocable to him or her.6

Under section 6015(c), the standard to be met is actual knowledge. The determination does not involve the facts as they apply to “constructive” knowledge, or an individual’s “reason to know” in connection with the deficiency.7

3. IRC §6015(f)

Finally, Congress enacted a "last resort" provision to enable relief in situations where section 6015(b) or (c) do not apply. IRC §6015(f) provides for “equitable relief.” Under section 6015(f), relief may be granted if:

(a) Taking into account all the facts and circumstances, it would be inequitable to hold the individual liable for any unpaid tax or any deficiency.

(b) Relief is not available to such individual under subsection (b) or (c).8

Relief under 6015(f) often turns on an analysis of knowledge and hardship, along with significant benefit, factors also considered in the above analysis of section 6015(b).

Where does this leave Lisa and Patty? The initial analysis must focus on the sections of 6015 under which they may qualify for relief. All applicable code sections should be elected on Form 8857. A request is initiated by completing IRS form number 8857, Request for Innocent Spouse Relief, and it was filed with the designated IRS Service Center. If relief is requested under section 6015(a) or (b) it is automatically considered under 6015(f). If relief is requested under 6015(f), it is not automatically considered under either of the other provisions if they are applicable.

Lisa is divorced from John. They have been divorced for more than twelve months. The liability is a result of an understatement of tax. She is eligible to file for relief under IRC §6015(c), as well as 6015(b) and alternatively under 6015(f). The specific facts of Lisa’s case will determine whether she will be granted relief.

Patty is still married to Bob. The liability is due to an understatement of tax. She is eligible to file for relief under IRC § 6015(b), and alternatively under 6015(f). The most significant hurdle for Patty to overcome is that she had no knowledge or reason to know of the understatement of the tax.

This provision is an important consideration for practitioners, particularly practitioners who represent married individuals, to assure that their rights are protected, and that all potential avenues for relief in liability cases are considered.

Kathleen Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP.  She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.

1. Kling v. Commissioner, T.C. Memo 2001-78 (March 30, 2001).
2. Cheshire v. Commissioner, 2002 WL 200612 (5th Cir.) See also, Reser v. Commissioner, 112 F.3d 1258, 1262-63 (5th Cir.1997).
3. 26 U.S.C. 6015(b)(1)
4. 26 U.S.C. 6015(b)(2)
5. 26 U.S.C. 6015(c)(1)
6. 26 U.S.C. 6015(c)(2)
7. 26 U.S.C. 6015(c)(3)(C); See also, Cheshire v. Commissioner, 115 T.C. 183 (2000), affirmed, 2002 WL 200612 (5th Cir.)
8. 26 U.S.C. 6015(f)

Comments powered by CComment