Definition of Innocent Spouse Rule’s Equity Requirement
In previous blogs we have covered innocent spouse relief and its three objective requirements for approval (understatement of liability, no actual knowledge, and less than two years from the first collection activity). But if the IRS really wanted to split hairs and deny innocent spouse claims, they could do so by citing the innocent spouse rule’s equity requirement as a basis to do so. What is that you might be asking? Well read on to find out….
The Equitable Relief Doctrine
Once again, the claimant has the burden of proof in these matters, so would-be innocent spouses must establish that it is equitable (i.e. fair), considering all the evidence, for the IRS to absolve them of responsibility for paying the unpaid taxes and penalties.
A similar analysis occurs under the equitable relief doctrine. As discussed in a previous post, this relief is available if the claimant does not qualify for innocent spouse relief, due to knowledge of the understatement, the passage of time, or some other reason.
Measuring the Innocent Spouse Rule’s Equity Requirement
In part, what is fair or unfair largely rests on the evidence the claimant presents. If it is strong, the equities clearly lie with the claimant. However, if it is barely enough to clear the evidentiary hurdle, the IRS will probably look to some additional factors, such as:
- Abuse: Mistreatment is not really relevant to the objective factors, but it is highly relevant here. If the claimant reasonably feared reprisal if s/he asked questions about a seemingly errant return, such a spouse arguably deserves relief.
- Lack of Knowledge: The less the claimaint knew, the more powerful the equities are in his/her favor.
- Current Financial Hardship: This factor may be the biggest one. It is often present as well, since over a quarter of divorced women over 50 live below the poverty line whereas 11 percent of divorced men over 50 are impoverished.
- Benefit Received: Many disputes regarding the innocent spouse rule’s equity requirement hinge on this issue as well. If the claimant benefitted from the understatement, perhaps by moving to a larger house or, in the words of Publication 971,“owning luxury assets and taking expensive vacations,” it is hard to play the victim card.
- Physical or Mental Health: This one does not come up too often, but occasionally, claimants are so weighed down by these kinds of problems that they are not thinking clearly when they evaluate a return before signing it.
- Compliance: This requirement is relatively new. Similar to the benefit prong, if the claimant is not current on his/her taxes, or has not made a good faith effort to comply, the equities may lie with the IRS.
- Divorce or Separation: If the claimant’s spouse abandonded the marriage and/or the parties have been divorced for quite some time, the equties lie with the claimant.
These factors are just a starting point because determining the equities in a particular situation is a subjective exercise. So, partnering with an experienced tax defense attorney is the best way to satisfy the innocent spouse rule’s equity requirement.