Posted by: Garcia & Cuadra, PA | October 22, 2012

Current Innocent Spouse Provisions (Part IV)

Partial relief from tax liability for understatement of other spouse is available for all qualifying filers by the innocent spouse relief provisions under §6015(b).  A spouse electing relief under §6015(b) may be entitled to partial relief from liability for an understatement attributable to erroneous or omitted items of the other spouse if the requesting spouse establishes that she (he) did not know and had no reason to know the full extent of the understatement.  This applies whether or not the requesting spouse continues to be married to or reside in the same household with the joint filer.  In such a case, the requesting spouse is relieved of liability for tax (and additions to tax) to the extent the liability is attributable to the portion of the understatement of which she (he) did not know or had no reason to know.  As an example, assume a spouse who kept the sum of $2 million of embezzled funds in a separate bank account which he used to support his gambling habit.  The embezzler deposited $10,000 of those funds each month into a joint bank account maintained with the non-embezzling spouse.   The non-embezzling spouse had no knowledge or reason to know of her spouse’s embezzlement, but she did have knowledge of the $120,000 ($10,000 for 12 months) deposited in the joint account during the taxable year.  As a result, the non-embezzling spouse may be relieved of the tax liability arising from $1,880,000, but not for the deficiency arising from $120,000 of the embezzled funds of which she knew or had reason to know.

For separate allocation of deficiency relief contained in §6015(c). several changes were instituted by the 1998 IRS Reform Act to provide relief for victims of domestic abuse.  One of these is the election to have a separate determination of the requesting spouse’s deficiency.  This election to allocate a deficiency is available only to a spouse who: (1) is no longer married to the non-requesting spouse (divorced or widowed), or is legally separated; or (2) has not been a member of the same household as the non-requesting spouse at any time during the 12 month period ending on the date of the filing of the election for relief.  No election for separate allocation of deficiency may be made if assets were transferred to the requesting spouse pursuant to a fraudulent scheme of the requesting and non-requesting spouse.

(More to follow on this topic on our next blog)

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