During my many years as a New Jersey family attorney I have helped many people start fresh with new lives without their former spouses. Unfortunately I also know that sometimes the mistakes of our former spouses can continue to haunt us. Having to deal with the Internal Revenue Service because of your ex-spouse’s delinquencies can be a nightmare. The innocent spouse rule is meant to bring relief for innocent spouses so that they don’t needlessly suffer for an indiscretion that was not their fault.
The innocent spouse rule and tax relief
Many situations occur in which evasion of tax under a jointly filed return is attributable to one of the spouses, with the other spouse being wholly innocent of any knowledge of or participation in the evasion. Generally, when a wife and husband file a joint income tax return, each spouse is jointly liable for the full amount of tax on the couples combined income. This includes any additional tax, interest and/or penalties assessed by the Internal Revenue Service as a result of an audit. The Internal Revenue Service has the authority to pursue either spouse and collect the entire tax owed, not just the portion attributable to spouse’s income. The government may hold one spouse responsible for payment of all the tax due. Similar to a surety in which a creditor can seek payment from the surety without seeking payment from the obligor, the government can seek payment from one spouse without proceeding against the other or both spouses. The innocent spouse rule has been adopted to help solve this problem. To hold an innocent spouse accountable for the wrong doing of his or her spouse would be inequitable and unjust. There are certain common law principles and statutes that are designed to protect spouses from this possible injustice. Thus, an innocent spouse, who is forced to pay taxes, may request relief from the spouse who committed tax fraud.
Unfortunately, for many tax relief under the innocent spouse relief may prove to be difficult to accomplish. The requirements are very specific and stringent. The Internal Revenue Service will only give innocent spouse status to a spouse who did not have knowledge of his or her partner’s tax wrongdoings, or if the spouse’s signature was a forgery or obtained by misrepresentation, fraud, mistake, or duress.
Under 26 U.S.C.A § 6015(b), a spouse may seek relief if the spouse establishes that in signing the return the spouse did not know, and had no reason to know, there was an understatement of tax attributable to erroneous items of the other spouse, and that it would be inequitable to hold the spouse liable. Liability for taxpayers no longer married or taxpayers legally separated or not living together is limited. Where relief is not available to an individual under those subsections, 26 U.S.C.A § 6015(f) permits equitable relief if, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency.
The Internal Revenue Service Restructuring and Reform Act of 1998 includes three provisions which lessen the severity of this tax obligation. The first provision eases the requirements for someone filing a joint tax return to qualify as an innocent spouse, and avoid liability for the other spouse’s tax deficiency. The second provision allows widowed, divorced, legally separated, or couples living apart for at least a year who file joint tax returns, to make an election to limit their liability for deficiencies on a joint return. The third and final provision provides equitable relief for people not meeting the criteria for obtaining relief under the other two provision. Under equitable relief the IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax.
In certain circumstances, a spouse can choose to limit his or her liability for any deficiency on a joint tax return. If elected this limitation will correspond to that spouse’s allocable portion of the deficiency. However, this option can only be made if the spouses are no longer married, are legally separated or lived apart for at least twelve months before the election was made. If the election is made, the tax liabilities that resulted in the deficiency will be allocated between the spouses as if they had filed separate tax returns. To give an example, a spouse using such an election, generally will be liable for the tax on any unreported income only to the extent that he or she earned the income.
Relief in such circumstances is based upon knowledge. This election will not provide relief from a spouse’s tax items, if the IRS can prove that the person claiming relief actually had knowledge and knew about those items when he or she signed the return.
Under common law principles, a spouse can avoid tax penalties when the spouse’s signature was a forgery or obtained by misrepresentation, fraud, mistake, or duress. Misrepresentation is an assertion or manifestation by words or conduct that is not in accord with the facts. Fraud is a falserepresentation of a matter of fact—whether by words or by conduct, by false or misleadingallegations, or by concealment of what should havebeen disclosed—that deceives and is intended to deceive another so that the individualwill act upon it to her or his legalinjury. A mistake is defined as an unintentionalact, omission, or error. Mistakes are categorized as a mistake of fact of a mistake of law. A mistake of fact occurs when a person believes that a condition of event exists when it does not. A mistake of law is made by a person who has knowledge of the correct facts but is wrong about the legal consequences of an act or event.
Duress refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black’s Law Dictionary defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner [they] otherwise would not [or would]". Duress is pressure exerted upon a person to coerce that person to perform an act that he or she ordinarily would not perform. Duress has two aspects. One is that it negates the person's consent to an act, such as sexual activity or the entering into a contract; or, secondly, as a possible legal defense or justification to an otherwise unlawful act. A defendant utilizing the duress defense admits to breaking the law, but claims that he or she is not liable because, even though the act broke the law, it was only performed because of extreme unlawful pressure.
Furthermore, the Innocent Spouse Act of 1971 states that a spouse who filed a joint tax return may be protected from liability if he or she can show that: the joint tax return contains a substantial understatement of tax “attributable to grossly erroneous items” of the other spouse; the taxpayer did not know of the understatement when signing the joint tax return, or did not have reason to know; and it would be inequitable to hold the spouse liable because her or she did not derive any benefit from it beyond normal support from the income.
In practice innocent spouse relief is incredibly limited because of the difficulty in meeting the burdens of proof. The availability of statutory relief is also limited because the law’s stringent definition of “substantial understatement of tax,” and its failure to address situations arising from underpayment of tax.
If you have any questions about the innocent spouse rule in the State of New Jersey, please contact me today at (732)515-5593.