INNOCENT SPOUSE RELIEF – THE CONSCIENCE OF THE IRS

By Dale O’Neal, Tax Attorney

 EQUITY IS IN THE EYE OF THE BEHOLDER

Several years back, Congress and the President increased the subjective nature of tax administration by coming up with Internal Revenue Code Section 6015(f), pertaining to requests for innocent spouse relief.  It states:

“…if, taking into account all the facts and circumstances, if it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); the Secretary may relieve such individual of such liability”

As with any substantive changes in the law, it sometimes takes years for the details to work out as to the administration of the law.  That was the case with the revisions to innocent spouse law made in the 1990’s and it may be that the IRS is softening up on what it proposes to be the rules.

Congress and the President mandated equitable treatment within the ambiguous discretionary limits implied by the law. Our goal at the O’Neal Law Firm is to gather as much information as possible to support your claim and present that information in an organized, effective manner to the IRS.

TIME IS OF THE ESSENCE

The IRS can garnish up to 50% of your wages to satisfy tax debts.  The IRS is extremely powerful!  However, by filing an innocent spouse claim, the IRS will review your information and work with you on an appropriate settlement without excessive legal hair-splitting.  Your former spouse will receive copies of all documents you file, and, can file a response.  Under law, tax liability is joint and several which means the IRS can satisfy 100% of the tax debt plus penalty plus interest from either party – not necessarily half and half!

LEGAL REQUIREMENTS FOR INNOCENT SPOUSE RELIEF

In order for the IRS to grant innocent spouse relief, the following requirements must be met:

  • A joint income tax return for the year in question must have been filed with the IRS for the year in question; and,
  • Within that joint income tax return, an understatement of tax must have been made due to an error by your spouse.
  • You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998.

OUR MISSION

So now that you know why you should file an innocent spouse claim and if your claim qualifies, here’s how The O’Neal Law Firm will proceed . 

We, literally, want to plead your case.  We want to show the IRS your past, present and future with respect to your tax debt.  Our goal is to explain to them exactly who you are, what you have been through, and the travesty of your situation.  We will submit the required paperwork and then advocate your defense through the most elaborate means possible which may include video depositions of you and any witnesses to your claim.  Our concentration will be in the following areas, as applicable:

  • How much did you know, or should have known, about the level of income in your household and the filing of tax documents? When you signed the tax return that reflected an understatement of income, how much knowledge did you have?  Partial relief may be available for the amount you did not know about.
  • Any and all spousal abuse that occurred during that tax filing year(s). Spousal abuse is a very broad term and includes physical, emotional, psychological, sexual, or abusive threats involving a third party (i.e. threats to injure a child, if you failed to sign the tax return);
  • Your tax paying history;
  • Your legal obligation to pay the tax debt. You may not be legally obligated to pay if, during the tax year in question, you no longer owned the assets that generated the income, but your spouse did, as in the case of a divorce.
  • What significant benefit, if any, did you receive from the income being taxed?
  • What was the condition of your mental and physical health when you signed the tax return in question? Did you have the mental capacity to participate in fraud, or, the physical health required to actually question the tax documents in question?
  • Economic hardship that would be imposed upon you if your request is denied. Economic hardship can be shown by your providing 2 documents which you compile.  The first, a simple income and expense worksheet.  Income is usually determined by paychecks so attach copies of typical net paychecks you receive.  As far as expenses, review cash receipts, checkbooks registers, credit card statements, etc. and divide your expenses into categories such as food, clothing, housing, transportation, utilities, insurance, debt repayment, education and other recurring usual monthly expenses.  The second, a financial statement listing all of your outstanding financial obligations – mortgage, car loans, student loans, debts of any kind.
  • Lastly, whether or not your former spouse committed adultery during the marriage. Although not a legal factor, the IRS takes this into consideration along with the assumption of money being expended.

ALTERNATIVE FORMS OF RELIEF

Separation-Of-Liability relief is available when spouses have divorced or separated after filing a joint return.  While relief under Innocent Spouse could be for the entire tax understatement and penalties and interest, Separation-Of-Liability relief determines the liability of each spouse separately by allocating the income and deductions from the joint return to each spouse.  In essence, amending a joint return into separate ones.  To qualify for Separation-Of-Liability relief requires the following:

  • A joint income tax return must have been filed for the year in question;
  • At the time you file Form 8857, you and your spouse must be divorced ,or are legally separated, or have not been members of the same household during the prior 12 months;
  • Any relief will not apply to any portion of the tax understatement that is due to erroneous items about which you had actual knowledge; and,
  • There was not transfer of property to you for the main purpose of avoiding tax or payment of tax.

Equitable relief under section 6015(f) may be available if you don’t qualify for Innocent Spouse or Separation-of-Liability relief and be relieved of liability for understated or unpaid tax.  To qualify for this relief, an individual must have an unpaid amount of understated or underpaid tax, must not be eligible for relief under either of the two previously mentioned sections, and

  • After taking into account all of the facts and circumstances, it would be unfair to hold the spouse liable for the understated or underpaid tax;
  • There was no transfer of any property to one another as part of a scheme to avoid tax or to defraud the IRS or another third party such as an ex-spouse, creditor or business partner;
  • The income tax liability from which relief is sought by one spouse is attributable to a tax item or omission of the other spouse (Revenue Procedure 2003-61). to defraud the IRS or another third party such as an ex-spouse, creditor or business partner; and
  • The income tax liability from which relief is sought by one spouse is attributable to a tax item or omission of the other spouse (Revenue Procedure 2003-61).

Note that innocent spouse relief and separation-of-liability relief apply only to an understatement of tax, but equitable relief also applies to any underpayment of tax. Also note that although innocent spouse and equitable relief under sections 6015(b) and (f) can result in a refund, separation-of-liability relief under section 6015(c) does not result in a refund (see section 6015(g)(3)).

Taxpayers in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) should know that a determination under any of the provisions of section 6015 is made without regard to community property laws. Relief is also available under section 66 for taxpayers in community property states who have a similar problem: They are married but living apart from each other and filing separately, and they omit from gross income their share of community earned income. Like section 6015, section 66 has both “traditional” and equitable relief provisions (sections 66(a) and (c), respectively). Form 8857 is also used for this type of innocent spouse relief.

Both sections 6015(b) and (c) require requesting relief by filing Form 8857 within two years of the initiation of an IRS “collection activity” with respect to the innocent spouse. Treas. Reg. § 1.6015-5(b)(2) provides that collection activities include notice of an intent to levy (a section 6330 notice) offsetting one spouse’s separate overpayment against a joint liability, and certain other legal actions taken by the IRS. Although the equitable relief provisions of section 6015(f) contain no mention of a time limit for filing, in Treas. Reg. § 1.6015-5(b)(1) the IRS applied the same two-year limit to equitable relief under section 6015(f). The Tax Court has ruled in favor of several plaintiffs who argued that the omission of any stated time limit in the statute means Congress intended for there to be none, and that the regulation is invalid.

The IRS maintains that the same time limit found in sections 6015(b) and (c) nonetheless applies to section 6015(f), and the Seventh Circuit held the regulation to be valid. Similarly, although section 66(c) doesn’t mention a time limit for community property equitable relief claims, the IRS applies a two-year limit for them as well (Revenue Procedure 2003-61, section 4.01).

WHAT TO BRING FOR YOUR INTERVIEW WITH THE ONEAL LAW FIRM

Please bring the following items with you for your interview:

  • A copy of the transcript of your case from the IRS. The transcript is the IRS’ file on your case and can be obtained by contacting the IRS office that issued correspondence.  If you do not have a copy, we will obtain one for you.
  • Any and all information relative to the areas of our firm’s concentration listed above in OUR MISSION. This includes the income and expense worksheet and financial statement described above. Additionally, make and bring with you a detailed list of each and every event that falls within any of the areas of our concentration.  Remember, the O’Neal Law Firm is telling your story to the IRS.  Obtain copies of any and all documents that substantiate your story within these areas.
  • Make a list of each and every witness to every act that occurred within any of the above areas. The list should include the witnesses name, mailing address, telephone number, email address and a short narrative of what the witness saw and heard.
  • Bring a copy of any documents you signed in connection with your tax liability (i.e. divorce decree).
  • A copy of each and every medical record(s) that shows abuse – emergency room reports, prescriptions, explanation of benefits from health insurance company.

PENDING DIVORCE FROM AN ABUSIVE SPOUSE

If possible, the divorce court pleading should include content to maximize the possibility of a favorable ruling. If applicable and your state allows, your divorce court pleadings should allege that you are a victim of some sort – a victim of abuse, manipulation, secrecy, financial mismanagement by your spouse.  Or, possibly, that you suffer mental or physical health problems.  All of these should be substantiated with factual allegations not mere conclusions.  Also, if allowable, divorce pleadings should have a notarized affidavit attached that sets forth in detail and with specific dates, any events of abuse.  This affidavit can be used as evidence in your Innocent Spouse Petition so it is important that it contain as many factual allegations as can be legally supported. Your divorce pleadings and this affidavit will be filed in the public records and will be stamped by the court clerk as evidence of such.  A copy will be sent by our firm to the IRS as part of our handling of your Innocent Spouse claim.

Also, our firm will review all divorce depositions.  In the event we are co-counsel on the divorce, then, our firm will participate in the divorce depositions.  In divorce court, the actual depositions are not always filed the divorce court file, but there is almost always a certificate filed showing that a deposition was taken, which party requested the giving of a deposition, the name of the witness, etc.  If we determine the deposition is overall beneficial for your Innocent Spouse claim, we will copy and submit it to the IRS. 

INJURED SPOUSE RELIEF

In addition to the forms of relief mentioned above, the is Injured Spouse relief which usually occurs when a refund due (or a portion of a refund due) from a filed joint return was intercepted by the IRS as a result of one spouse’s tax filings prior to the marriage.  The logic is that the Innocent Spouse cannot be legally liable for tax returns and insuing liabilities that occurred prior to the marriage.

THE PETITION AND THE PACKAGE

Our firm submits a “package” of information to the Office of Innocent Spouse whenever we file a petition. An organized package of information, facts, affidavits, depositions, video depositions, medical transcripts, etc.

Most firms submit a petition. In our firm, the petition is only a small part.

We organize the package of information in order to have the greatest impact on the Office of Innocent Spouse. We determine which of the eight categories is our strongest case, and we organize the submission packet accordingly.

OUR SUCCESS RATE: To date, our firm has had 100% success in our Innocent Spouse Petitions. We try to go above and beyond. Our objective is to overwhelm the IRS, and to intimidate the former spouse. Remember that the former spouse will be given an opportunity to respond. The former spouse will receive copies of all documents we file with the Office of Innocent Spouse. In my experience, if we overwhelm everyone with our evidence, the other side often chooses to simply never respond. If we overwhelm everyone, often the other side fails to respond and the IRS can rule in our favor like a “default ruling. ” We are available to work as co-counsel with referring attorneys and enrolled agents and CPA firms.

We are available for outright referrals.

We are available for divorce consultations or to co-counsel divorce litigation.

Please call me at 817-877-5995. We have a nationwide innocent spouse IRS practice.

Our firm has represented clients in each of the following states: California, Texas, New York, Pennsylvania, Arizona, Florida, Indiana,​ New Mexico, Colorado, Vermont, Maine, Oregon, Washington State, Washington DC, Montana, Wyoming, Nebraska, South Dakota, Louisiana, North Dakota, Oklahoma, Georgia, Virginia, Massachusetts, Missouri, Maryland, Wisconsin, South Carolina, Alabama, North Carolina, Kansa, Nevada, Pennsylvania, Ohio, Michigan, New Jersey, Alaska, Connecticut, Iowa, Utah, Mississippi, Arkansas, Kansas, Idaho, Hawaii, New Hampshire, Maine, Rhode island, and other locations throughout the world.