Innocent Spouse Relief - A Primer for Tax Practitioners - Speakers Eric L. Green, Esq. Sheila Charmoy, Esq. Teresa Chen, Esq - Tax Rep Network
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Innocent Spouse Relief
A Primer for Tax Practitioners
Presented by:
Eric L. Green, Esq.
Sheila Charmoy, Esq.
Teresa Chen, Esq.
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Speakers
Eric Green Sheila Charmoy Teresa Chen
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Dissolution of Marriage
Cases are resolved in the following manner:
Uncontested Divorce: Requires the parties to
enter into a Separation Agreement prior to the
uncontested hearing.
Memorandum of Decision: This is the decision
rendered by a judge after a divorce trial.
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Alimony & Child Support
Conn. Gen. Stat. §46b‐82: At the time of entering a decree of divorce, the Superior Court may order either of
the parties to pay alimony to the other. Statute gives the court authority to secure alimony obligations with
life insurance.
Conn. Gen. Stat. §46b‐83: Provides the Superior Court with authority to enter orders of temporary alimony
during the divorce case.
Factors Considered by the Court:
Length of the marriage, age, health, station, occupation, amount and sources of income, vocational skills,
education, employability, estate and needs of each of the parties, property awards made, and the
desirability and feasibility of the custodial parent securing employment.
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Alimony & Child Support
Conn. Gen. Stat. §46b‐84: Upon the decree of
divorce, the parents of a minor child shall maintain
child support in accordance with their respective
abilities. (CT Child Support Guidelines). Also provides
the court with authority to order health insurance to
be paid for.
• Terminates upon 18th birthday unless
still in high school and then it
continues until graduation or age
19th, whichever event first occurs.
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Property Division
Conn. Gen. Stat. §46b‐81: At the time of divorce, the
Superior Court may assign to either spouse all or part of the
state of the other spouse. EQUITABLE DISTRIBUTION.
Factors Considered by the Court:
Length of the marriage, age, health, station,
occupation, amount and sources of income, vocational
skills, education, employability, estate, liabilities and
needs of each of the parties and the opportunity of
each party for future acquisition of capital assets and
income. The court also considers the contribution of
each of the parties to the acquisition, preservation or
appreciation in value of their respective estates.
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Alimony
Prior to 2018, Alimony was deductible by the payor and income to the
recipient
The payment must be in cash.
In 2018, the tax law changed and Alimony is no longer deductible to the
payor and income to the recipient. However, cases adjudicated prior to
2018 remain deductible to the payor and income to the recipient.
As a result, alimony awards are now less than they were prior to 2018. In
Connecticut, alimony and support are to be calculated by the parties’ net
income. Keller v. Keller, 167 Conn. App. 138 (2016).
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Child Support
Not deductible by the payor nor
income to the payee
Property settlements between
spouses/former spouses are also
not taxable. Lump sum alimony
has become more attractive to
divorcing spouses since the
change in the tax law.
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Unallocated Alimony & Child Support
Not as common anymore given the tax changes.
Usually see it now more often in high income cases.
Requires parties to go back to Court once the alimony term
ends to recalculate child support.
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Joint Liability
So now the returns are filed
Joint Liability
Innocent Spouse Relief
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Quiz
What is the difference
between Innocent
Spouse Relief and
Injured Spouse Relief?
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Why Do We Need Innocent Spouse Relief?
• Spouses may file a joint tax return. I.R.C. § 6013
• Both spouses are individually liable for the taxes due on a joint tax
return regardless of who earned the income and the IRS can collect
from both spouses. I.R.C. § 6013(d)(3)
• May lead to inequitable results
• Death
• Separation or divorce
• Returns filed without consent
• You can MFS and amend to go joint. You cannot amend a joint to go
separate once its filed
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Joint Liability
• Paragraph inserted into divorce agreements making one spouse
liable is not binding on the IRS
• This is really grounds for suing your former spouse when the IRS
seizes assets and/or income
• It will be one item considered for equitable relief in innocent
spouse
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Step 1: Was There a Valid Joint Return?
• General Rule: The most important factor in deciding whether a
return qualifies as a joint return is whether the couple intended to
file a joint return.
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Step 1: Was There a Valid Joint Return?
• Paper Returns Not Signed by Spouse: In general, a return must be signed by both spouses to be a
valid joint return.
• Exception 1: Express Consent to File Joint Return:
• Where one spouse expressly authorizes the other spouse to sign the return, courts have found the
requisite intent for a joint return.
• Exception 2: Tacit Consent to File Joint Return:
• Where one spouse tacitly consents to the filing of a joint return, courts have found the requisite intent for
a joint return.
• Electronically Filed Returns:
• For electronically filed returns, whether a requesting spouse signed a return is determined by examining whether
he or she signed the Form 8879, IRS e‐file Signature Authorization.
• Did the spouses file separate returns?
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Step 1: Was There a Valid Joint Return?
• Tacit Consent
• Did the requesting spouse have a filing requirement?
• Did the requesting spouse file a joint return for prior years?
• Did the requesting spouse participate in preparation of return?
• Did the requesting spouse receive a tax benefit?
• Did the requesting spouse have a non‐tax reason to file a joint tax return?
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Step 1: Was There a Valid Joint Return?
• Returns Signed Under Duress: A return signed under duress is not a
joint return
• Proving Duress: To prove duress, the spouse must show that he or she:
(1) was unable to resists the demands to sign the return, and
(2) would not have signed the return but for the constraint applied to his or
her will.
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Step 1: Was There a Valid Joint Return?
• Forged Returns
• Requesting spouse did not sign the return and there was no tacit consent.
• There is no ASED for the requesting spouse, until he or she files a return.
• The ASED for the nonrequesting spouse begins when the joint return was
due to be filed, or was filed, whichever occurred later
• If the signature was forged, but the return is also unlawful or invalid,
process as a forgery.
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Step 1: Was There a Valid Joint Return?
• Invalid and Unlawful Returns
• Amended return changing to separate filing status filed prior to the due
date of the return.
• The ASED begins when the joint return was due to be filed, or was actually
filed, whichever occurred later.
• All previously issued refunds must be taken into consideration.
• When it has been determined that the joint election was invalid (e.g., the
taxpayers were not married, the IRS will determine each taxpayer’s
separate liability.
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Innocent Spouse
• IRC 6015 Creates 3 types of innocent spouse relief
• B – Innocent Spouse Relief
• C – Separation of Liability Relief
• F – Equitable Relief
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20IRC 6015(b) Relief
• Understatement is due to an erroneous item
• Innocent spouse did not know or have reason to know of the understatement
• Inequitable to hold them responsible for the tax
• Requested relief within 2 years of when collection activity began
• Allocation of the liability
• Refund is available if granted within 3 years of the return filing
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IRC 6015(c) Relief
• Must be divorced or legally separated for at least 12 months
• No actual knowledge of the understatement of the item giving rise
to the liability
• Must be requested within two years of collection activity beginning
• Will be treated as if they filed separately
• No refund available here, but liability is separated
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22IRC 6015(f) Relief
• Revenue Procedure 2013‐34 lays our the IRS approach to evaluating
claims for equitable relief
• Takes into account all facts and circumstances
• For underpayments you must use equitable relief (ex‐husband’s
bogus estimated payments)
• Liability is apportioned
• Refunds are available
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Erroneous Item
• Improper deductions (cheating husband with the girlfriend)
• Omitted income (gambling accountant, skimming from the
restaurant)
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24Other Factors the IRS will consider
1. Marital status.
2. Economic hardship.
3. Knowledge or reason to know.
4. Non-requesting spouse’s legal obligation.
5. Significant benefit.
6. Compliance with income tax laws.
7. Abuse
8. Physical/mental health
9. Financial dominance
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Hell Hath No Fury…Beware the Angry Spouse
• Restaurant with the skimming ex‐husband
• Landscapers and cashing checks to pay the undocumented workers
• Be careful before you whistleblow…
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26Whistleblowing; Be Careful What You Wish For…
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The Request
• The election is made by filing IRS Form 8857, “Request for
Innocent Spouse Relief”
• The Form must be filed within two years after the IRS begins
collection activity for the tax return in question in order to
obtain relief under either IRC § 6015(b) or IRC § 6015(c)
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28Form 8857
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Form 8857
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30Requesting Innocent Spouse Relief
• Prepare to support your case with documentation
• Consider whether the returns were actually signed by the innocent
spouse (E‐Filed)
• Focus on inability to pay if they are CNC
• Prepare to Appeal the centralized units decision
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Collection Activity
• IRS off‐sets the taxpayer’s income tax refund;
• The filing of a claim by the IRS in a court proceeding;
• The filing of a suit by the United States against the taxpayer to
collect the joint liability;
• The issuance of an IRC § 6330 notice of the IRS’s intent to levy
and the taxpayer’s right to a Collection Due Process (CDP)
hearing
• Can raise at your CDP hearing (See Form 12153)
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32Other Issues
• Did the client even sign the return?
• Did he or she have knowledge of the issue (he’s been skimming for
years!)
• Former spouse can intervene (33% relief when they do vs 25%
when they don’t)
• Not a forum for retrying your divorce!
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Innocent Spouse Letters
Received 8857 Decision Received Your Appeal
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34United States Tax Court
• File the case
• $60 fee
• IRS Office of Chief Counsel will respond (45 days)
• Consider Qualified Offer to resolve the case
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36An Offer They Can’t Refuse
• IRC §7430 Qualified Offer
• Anytime from Appeals until 30 days before trial
• Sets the bar for who is the prevailing party
• Obtain costs from the IRS
• Legal fees
• Help settle your case!
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Qualified Offer
Dear Mr. _________:
This is a Qualified Offer made pursuant to I.R.C. Sec. 7430(g). The
taxpayer offers to settle for $_________.00 the proposed responsibility
for her 2012, 2013 and 2014 federal income tax returns. This Offer
shall remain open until the earliest of the date such offer is rejected,
the date trial begins, or the 90th day hereafter in accordance with
Treas. Reg. Sec. 301.7430‐7.
Thank you.
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38The Intervening Spouse
The spouse of the taxpayer that files for innocent spouse is allowed to
intervene
They will be notified of the filing and can submit information and testify as to
why the taxpayer should NOT be given relief
This is often an issue when you have an abused spouse, because the filing
cannot be kept a secret
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Non‐Requesting Spouse (NRS)
IRC § 6015(h)(2): NRS must be notified and given an opportunity to
participate in any administrative proceeding
If full or partial relief is granted to the RS, the NRS can file a protest with IRS
Appeals
NRS can intervene if RS filed a petition in Tax Court
NRS can’t appeal the Tax Court decision
NRS can’t petition the Tax Court
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40NRS Notice
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Non‐Requesting Spouse – Tax Court
Taxpayers receive relief in 25% of cases
In cases where NRS intervenes, it increases to 33%
Reason: Not a place to refight the divorce
If you represent the NRS, make sure you intervene in a professional way:
~ Text messages case
~ Submit documents
~ Submit affidavit
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42Checklist for the Taxpayer
• Was there a valid tax return?
• Did the client know or have reason to know
about the erroneous item?
• Are there factors that suggest the taxpayer
should not be responsible (9 factors)
• Does the client have an ability to pay?
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Checklist
• If rejected appeal
• Look out for idiotic answers from the IRS
(Lisa’s valid return but relief anyway)
• Can create issues for the state relief
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44Questions?
Eric Green: egreen@gs-lawfirm.com
Sheila Charmoy: sheilacharmoy@charmoy.com
Teresa Chen: tchen@gs-lawfirm.com
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