By Stephen J. Dunn
I have blogged at length on the perils of filing joint income tax returns, and the difficulty in securing innocent spouse relief from same.
Let’s say that Wife earns a good salary. She has enough Federal income tax withheld from her wages and paid over to the IRS to cover Federal income tax on her wages. As a result she owes no liability to the IRS. Husband, however, is a self-employed businessman. He pays no estimated income tax. He owes substantial Federal income tax on his income. If the couple files separate income tax returns—“married filing separately”—then Husband will owe substantial income tax. Wife, however, will owe no income tax. She may even be due a refund. Because they filed separate tax returns, neither is liable for tax on the other’s income.
But if the couple files a joint income tax return, then each of them will be jointly and severally liable for the income tax reported, or properly reportable, on the joint return. Joint and several liability means that each spouse is liable for up to the full amount of the liability, though the IRS cannot collect more than the full amount of the liability. The election of joint and several liability is irrevocable—once made it cannot be revoked by, say, an amended tax return.
Accountants often prepare joint income tax returns for a couple as a reaction, without advising Wife in our example that she could file separately, or of the consequences to her of filing a joint return.
Internal Revenue Code § 6015 empowers the Commissioner of Internal Revenue to relieve a spouse from liability for a joint income tax return. The IRS issued Revenue Procedure 2003-61 to interpret IRC § 6015, and provide procedure for seeking relief under it. But the IRS and the U.S. Tax Court applied Rev. Proc. 2003-61 strictly, narrowly, denying relief to deserving spouses.
In January, 2012, the IRS issued Notice 2012-8, immediately effective, making innocent spouse relief more broadly available. Indeed the IRS is applying Notice 2012-8 in spirit, as we are seeing a marked increase in applicants granted innocent spouse relief. In one recent case, the applicant was denied relief by the IRS Innocent Spouse Office, but later granted innocent spouse relief by the IRS Appeals Office.
In another case the applicant lost after trial in Tax Court. Then the IRS issued Notice 2012-8 seemingly directed at the taxpayer’s facts. The taxpayer re-applied for innocent spouse relief, and it was quickly granted.
So, a taxpayer denied innocent spouse relief under the old regime should consider applying anew under Notice 2012-8.
Two themes pervade Notice 2012-8: abuse by the nonrequesting spouse (Husband, in our example); and financial control by the nonrequesting spouse.
Notice 2012-8 recognizes that abuse can be other than physical—it can be psychological or emotional. Making major financial decisions without input from the requesting spouse (Wife, in our example) could be an example of both abuse and financial control by the nonrequesting spouse. Drug or alcohol abuse can also be a form of abuse. Many other forms of abuse can be envisioned, such as prolonged absences from the home; large, unexplained inflows or outflows of cash; and separate bank accounts beyond the reach of the requesting spouse.
Police reports are good evidence of physical abuse. Notarized statements from the requesting spouse’s psychiatrist, psychologist, or primary care physician can provide good evidence of psychological or emotional abuse.
Ordinarily I review documents before they are submitted to the IRS on behalf of my client. Attending doctors’ statements of abuse may be so personal that the client may want to submit them directly to the IRS. I have no problem with this. IRC § 6103 forbids the IRS from disclosing the existence or content of such statements.