Increased protection for innocent spouses.
All Joint Filers
The requirements for relief from liabilities that apply to all joint filers under Sec. 6015(b) are:
* Taxpayer must have filed a joint tax return;
* There must be an understatement of tax attributable to erroneous items of one of the individuals filing the joint return (Note: Gone is the prior law understatement threshold of $500. In addition, there is relief for simply "erroneous," not only "grossly erroneous," income items. Many more taxpayers will now be eligible for relief.);
* The other individual filing the joint return must establish that in signing the return, he did not know and had no reason to know that there was such an understatement;
* Taking into account all the facts and circumstances, it is inequitable to hold this other individual liable for the deficiency in tax for such tax year; and
* The other individual must elect the benefits of this section no later than two years after the date the IRS begins collection activities with respect to the individual making the election. (Note: The Service has 180 days from July 22, 1998 to develop a separate form with instructions for taxpayers to use in applying for relief.)
The liability is relieved if the taxpayer meets these requirements, to the extent of the understatement of tax due to the erroneous items.
Proportionate Relief Available
Sec. 6015(b) (2) provides for relief of liability to the extent that the individual did not know or have reason to know the extent of the understatement. This allows for a partial relief of liability in situations in which a spouse knew something, but not everything.
Taxpayers Legally Separated, Not Living Together or No Longer Married
Under Sec. 6015(c), a taxpayer filing a joint return may elect to limit his liability to the amount of deficiency arising from items that would have been allocable to the electing taxpayer if he had filed a separate return. The requirement for this new relief provision is that, at the time the election is filed, the taxpayer is no longer married to or is legally separated from the individual with whom the joint return was filed. An election for relief can also be made if the taxpayer was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed.
Anti-abuse safeguards for the IRS built into this new provision include:
* If assets are transferred between individuals filing a joint return as part of a fraudulent scheme by those individuals, an election for relief shall be invalid; and
* If the taxpayer making the election had actual knowledge at the time he signed the return of any item giving rise to a deficiency (or portion thereof) not allocable to him, the election will not apply to that part of the deficiency. However, this provision will not apply if the taxpayer with the actual knowledge signed the return under duress. (Note: The actual knowledge standard appears to be subject to a narrower interpretation, in comparison to "did not know or had no reason to know" for all joint filers.)
Allocation of the Deficiency
Any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals filed separate returns for the year. Community property law is not taken into account in determining separate liability.
Comment: Note that Sec. 6015(a)(2) allows taxpayers to make both elections described above if the taxpayer qualifies to do so. Sec. 6015(b) relief for all joint filers is more liberal that the relief for divorced and separated taxpayers but harder to attain. Filing both elections may offer an insurance policy that there will be at least some relief granted.
Tax Court Review
The Tax Court will have jurisdiction to determine the appropriate relief available to the taxpayer if the Service denies or fails to rule on an application for relief. There are also restrictions on collection activity when an election for innocent spouse relief or separate liability has been made until the 90-day period for petitioning the Tax Court has expired or a Tax Court decision becomes final. Finally, the Tax Court is authorized to establish rules allowing the other spouse (nonelecting joint return filer) to become a party to any proceeding before the court.
Effective date: These provisions apply to any tax liability arising after July 22, 1998, and any tax liability arising on or before July 22, 1998, but remaining unpaid as of July 22, 1998 (the date of enactment of the IRS Restructuring and Reform Act of 1998).
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|Publication:||The Tax Adviser|
|Date:||Oct 1, 1998|
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