The IRS has made some taxpayer-friendly changes to the equitable innocent spouse rules. These rules relieve a taxpayer from joint liability in cases where it would be unfair to require him or her to pay a tax debt caused by a current or former spouse.
Innocent spouse relief
A spouse who believes he or she should not be jointly liable for tax debts may seek innocent spouse relief. To assist as many taxpayers as possible, Congress allows the IRS to grant equitable relief to the innocent spouse when it would essentially be unfair to make the spouse responsible for the jointly held tax liabilities. The decision to grant equitable relief is entirely within the discretion of the IRS. If a taxpayer disagrees with the IRS’s decision, he or she can seek judicial relief.
Facts and circumstances
The IRS weighs all the facts and circumstances when deciding whether or not to grant equitable innocent spouse relief. The IRS uses various factors to evaluate requests for equitable innocent spouse relief. Some of the factors weigh in favor of granting relief, some weigh in favor of denying relief, and others are neutral.
In the new guidance, the IRS revised some of the factors. The economic hardship factor now provides minimum standards, based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. Lack of economic hardship will no longer weigh against relief, but will be neutral. The IRS also revised the knowledge, legal obligation and compliance with tax law factors.
The IRS receives many requests from spouses who have been in an abusive relationship. The IRS recognizes that abuse can take many forms: physical, emotional and mental, for example. All the facts and circumstances are considered in determining whether a requesting spouse was abused. The impact of the non-requesting spouse’s alcohol or drug abuse is also considered in determining whether a requesting spouse was abused. Depending on the facts and circumstances, abuse of the requesting spouse’s child or other family member living in the household may constitute abuse of the requesting spouse. The new guidance is intended to give greater deference to relief in the presence of abuse.
Many spouses may fear retaliation if they inform the IRS about the tax evasion of their spouse. Under the new guidance, if the non-requesting spouse abused the requesting spouse or maintained control over the household finances by restricting access to financial information, and because of the abuse or financial control the requesting spouse feared retaliation, that abuse or financial control will weigh in favor of granting relief.
In some cases, the IRS will attempt to streamline a taxpayer’s request for equitable innocent spouse relief. Generally, the requesting spouse must show that he or she will experience economic hardship if relief is denied. Additionally, the requesting spouse must no longer be married to the non-requesting spouse.
If you have any questions about the IRS revisions to the equitable innocent spouse rules, please contact your Brown Smith Wallace Tax Advisor, or Roy Kramer, CPA, at 314.983.1265 or firstname.lastname@example.org.