By Johnson, Linda M.; Clements, Bruce
The CPA Journal , Vol. 72, No. 12
When a married couple files a joint tax return, both spouses become jointly and severally liable for the income taxes due, including any additional taxes, interest, and penalties determined at a later date. In the event of an underpayment of income tax, the IRS can proceed against either spouse to collect the entire tax deficiency. This places a spouse in a precarious position in situations where the other spouse deliberately omits income or overstates deductions on a jointly filed income tax return, even if the spouse is totally unaware of the other's transgressions.
Although Congress attempted to correct for these possible injustices by enacting innocent spouse relief provisions in IRC section 6013(e), over the years it became apparent that many deserving spouses were being denied relief. The IRS Restructuring and Reform Act (IRSRRA) of 1998 replaced IRC section 6013(e) with section 6015; in addition to eliminating many of the eligE bility requirements, section 6015 provides additional avenues for obtaining relief from joint and several liability.
Relief from joint and several liability is available to spouses that signed and filed a joint return for the year in which an income tax deficiency is assessed and who satisfy the requirements under one of the following three areas:
* Innocent spouse relief under section 6015(b)
* Separate liability relief under section 6015(c)
* Equitable relief under section 6015(fj.
Three conditions must exist to be eligible for innocent spouse relief under IRC section 6015(b):
* The understatement of tax must be attributable to erroneous items of the nonrequesting spouse.
* The requesting spouse cannot have actual or constructive knowle of the understatement at the time the joint return is signed.
* It would be inequitable to hold the requesting spouse liable for the income tax deficiency.
Erroneous Items Attributable to the Nonrequesting Spouse
Erroneous items that result in an understatement of income tax include omitting gross income, overstating deductions or credits, and improperly characterizing income or deductions. Erroneous items can occur when an amount that was never paid or incurred is deducted on the tax return, or when an expenditure is deducted without support. When the erroneous items are attributable to the nonrequesting spouse, that satisfies the first condition for obtaining innocent spouse relief.
An erroneous item is attributable to the spouse whose activities or investments resulted in the item, without regard to community property laws. Therefore, wage income is allocated to the spouse who earned it, and dividend income is allocated to the spouse who owned the stock Erroneous items of income or deduction attributable to jointly owned property are allocated evenly, unless evidence supporting a different allocation is presented.
No Knowledge of the Understatement
This condition may be the most did cult to satisfy because it requires the requesting spouse to demonstrate the lack of both actual and constructive knowledge of the item that resulted in the understatement.
Knowledge of the source of the erroneous item is not sufficient to establish actual knowledge of the understatement. The requesting spouse, however, cannot deliberately avoid learning about the item and expect to be protected from joint and several liability. The fact that the requesting spouse was unaware of the tax consequences of the erroneous item is irrelevant if the spouse was aware that the erroneous item existed at the time the joint return was signed. In addition, the requesting spouse's ownership interest in the property that results in the erroneous item supports a determination that the requesting spouse has actual knowledge of the understatement. For spouses living in community-property states, however, the requesting spouse is deemed to have an ownership interest in property only if the requesting spouse's name appears on the ownership documents. …