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What If I Don’t Meet The Innocent Spouse Test?

Alternatives to Innocent Spouse for relief from joint tax debt

Debt Free Alternative
Anyone who has ever seen a Cops rerun knows that, in criminal court, defendants are innocent until proven guilty. But in tax court, taxpayers are essentially owe what the IRS says they owe until they prove their innocence. Establishing this innocence is not easy. Even if spouses meet the three objective parts of the innocent spouse rule (unintentional error, no knowledge, and less than two years), the Service can still deny the petition based on the amorphous “equitability” prong. Fortunately for people in these situations, there are some innocent spouse rule alternatives.

Experienced tax attorneys can quickly separate the sheep from the goats and determine if innocent spouses are truly “innocent” as far as the Tax Code is concerned. While the innocent spouse rule in Section 6105(b) is the preferred vehicle, because it absolves the innocent spouse of all liability, there are some innocent spouse rule alternatives for those who don’t qualify.

Separation of Liability

Most married couples file joint returns, which means that they are jointly responsible for all the taxes. But in some cases, the IRS will apportion the joint tax debt between the parties based on their ability to pay. The requirements are:

  • Understatement of Liability: Understatement probably means negligence or mistake as opposed to fraud or recklessness.
  • Separated: To meet this prong, the claimant spouse must eitehr be divorced, legally separated, or widowed. In the alternative, if the claimant has been physically separated from the other spouse for the last twelve months, the IRS will allow the claim on this element. Emotional separation (people who essentially live together as roommates) doesn’t count, and neither do long-term temporary separations due to incarceration, illness, and so on.
  • No Actual Knowledge: There is no constructive knowledge element in this innocent spouse rule alternative. Actual knowledge means that the claiming spouse knew about unreported income sources or knew that a specific deduction or credit was erroneous.

If the claimant spouse participated in any property transfer scheme, there is sufficient evidence of actual knowledge. Similarly, if the spouse is even one day short of the twelve month separation, the IRS nearly always denies these claims.

Equitable Relief

Courts are usually only concerned with what is legal or illegal. But occasionally, they also care about what is fair or unfair, and that’s where this innocent spouse rule alternative comes into play. The equitable relief innocent spouse rule alternative, which is outlined in Revenue Procedures Bulletin 2013-34 and a few other documents, has the following elements:

  • No Longer Married: The analysis here is the same as in the “separated” prong for separation of liability relief.
  • Economic Hardship: The IRS has a numerical formula to determine if paying the disputed taxes would constitute a hardship. Significantly, if the claimant does not meet the hardship test, that fact does not weight against the claim. It just doesn’t help it.
  • Actual Knowledge: Before 2013,  actual knowledge of the understatement essentially torpedoed the claim. But now, knowlegde has no more weight than any other element.
  • Benefit: If the claimant lived a lavish lifestyle because of the unpaid taxes, the equities are on the side of the IRS. However, if the other spouse controlled all the couple’s finances, as is often the case, the excess benefit is not a factor.
  • Abuse: Under the new rules, moderate to severe physical, verbal, emotional, or other abuse can “negate the presence of certain factors.” So, if a claimant knew about the understatement but was powerless to do anything about it due to abuse, equitable relief is still an option.

Also under the new rules, the claimaint must either be fully compliant with all tax obligations or at least have made a good-faith effort to be fully compliant.

The takeaway from all this is that even if the strict provisions of the innocent spouse doctrine disqualify you, there is no reason to panic, because the IRS has expanded the innocent spouse rule alternatives. Reach out to us today to see how we can help you.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.