Posted by: Garcia & Cuadra, PA | November 8, 2012

Current Innocent Spouse Provisions (Part V)

The separation of liability election under §6015(c) on a jointly filed return is not available for a deficiency relating to an item on the return of which the requesting spouse had actual knowledge.  As an example, spouses H and W file a joint federal income tax return for year 1.  They report W’s income as a self-employed musician, but they do not report the self-employment tax relating to that income.  Shortly after the couple obtains a divorce in year 3, the IRS issues a 30-day letter proposing a deficiency regarding to the unreported self-employment tax.  H files a timely election to allocate the deficiency to W under §6015(c).  The election is invalid because H had knowledge of W’s self-employment income at the time H signed the return.  This is true even though H did not know of the requirement to pay tax on self-employment income.

There is a question whether a requesting spouse has actual knowledge of an item giving rise to a deficiency if she (he) does not know that the item is improperly reported.  The Fifth Circuit Court of Appeals held in Cheshire v. Comr that the wife was not entitled to allocate liability to her husband under §6015 (c) because she had actual knowledge of the income-producing transaction even though she lacked knowledge that it was incorrectly reported.  Chesire involved a retirement distribution which was reported erroneously on the joint return as only partly taxable because the husband believed the portion used to retire home mortgage debt to be nontaxable.  The court found its conclusion supported by the general rule that ignorance of the tax law is not a defense to a tax deficiency.

As previously mentioned, one of the necessary conditions for separation of liability relief under §6015(c) is for the spouses to not be members of the same household at any time during the 12-month period ending on the date the election is filed.  A temporary absence will not render the requesting spouse eligible for the separate return method.  A temporary absence is one in which it is reasonable to conclude that the absent spouse will return to the household and the household is maintained in anticipation of the return.  Examples of temporary absences include absence due to incarceration, illness, business, vacation, military service, or education.

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

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