Innocent spouse relief is a complex and nuanced area of tax law that can be difficult to navigate. In order to successfully file a claim, one must have a thorough understanding of the rules and requirements.
One example of this complexity is found in Section 6015(c), which does not require that the innocent spouse not benefit from the tax savings. This provision simply allows the parties to separate their taxes and each pay tax on their own income. This issue was addressed in the court case of Tobin v. Commissioner, 157 T.C. No. 7 (2021).
It is crucial for those submitting innocent spouse claims to fully grasp the intricacies of Section 6015(c) relief before proceeding with their request. This knowledge is essential in order to make the appropriate arguments and provide the necessary evidence to support their claim. The specific requirements and nuances of this type of relief can differ significantly from traditional innocent spouse relief under Section 6015(b) or equitable relief under Section 6015(f).
Facts & Procedural History
Mr. and Ms. Tobin lived in California during the years 2013 and 2014, and filed joint returns for those years. Mr. Tobin was self-employed in three businesses: a plastic tubing resupply business, a weight loss sales business on Amazon, and a multi-level marketing sales business with Nu Skin.
Ms. Tobin, on the other hand, had been a wage earner but left the workforce in early 2013 to take care of the couple’s growing family.
Mr. Tobin handled the couple’s finances and tax returns, while Ms. Tobin was not involved in the preparation process and was unaware of the cashflows and amount of cash reserves her husband’s businesses generated.
The IRS audited their 2013 and 2014 returns and found deficiencies due to unreported income. According to the IRS, the 2013 return had failed to report about $3,000 of income attributed to Ms. Tobin (wages and unemployment compensation) and $97,000 paid to Mr. Tobin by Amazon. The 2014 return failed to report some $72,000 paid to Mr. Tobin by Nu Skin. These discrepancies led to a notice of deficiency and an assessment of the unpaid taxes.
Mr. and Ms. Tobin legally separated in 2017 and started divorce proceedings that year. Ms. Tobin filed for innocent spouse relief in 2019, but her request was opposed by her husband. Her husband submitted Form 12508, Questionnaire for Non-Requesting Spouse, stating that his wife should be denied relief as she was aware of the items of unreported income and directly benefited from the understatements of tax. The dispute ended up being litigated in the U.S. Tax Court.
About Innocent Spouse Relief
Section 6015(b), 6015(c), and 6015(f) are all provisions under the tax code that allow taxpayers to request relief from joint and several liability for any unpaid tax or deficiency. However, each provision has different requirements and conditions for relief.
Section 6015(b) is known as “innocent spouse relief” and allows taxpayers to request relief from joint and several liability for any unpaid tax or deficiency if they were not aware of the tax liability and did not benefit from the understated income. To qualify for relief under Section 6015(b), the requesting spouse must show that they did not know and had no reason to know about the tax underpayment. The requesting spouse bears the burden of establishing their innocence and must prove that they were actually ignorant of the transactions underlying the deficiency, and that they had no reason to know about it.
Section 6015(c) allows taxpayers to request relief from joint and several liability for any unpaid tax or deficiency by opting out of a previously filed joint return. This results in the taxpayers each paying tax on just their income. This provision eliminates the need for the requesting spouse to prove innocence of knowledge, but still allows the IRS to deny relief if they can show actual knowledge of the item causing the deficiency.
Section 6015(f) allows taxpayers to request equitable relief from joint and several liabilities for any unpaid tax or deficiency. This provision is available to taxpayers who do not qualify for relief under other provisions, such as Section 6015(b) or (c). To qualify for relief under Section 6015(f), the taxpayer must show that it would be unfair to hold them liable for the unpaid tax or deficiency, taking into account all the facts and circumstances, including any economic hardship that would result. The IRS has discretion in granting relief under this provision and may consider factors such as the requesting spouse’s knowledge or participation in the tax underpayment, and any abuse of the tax system by the other spouse.
Section 6015(c) & Knowledge of Underreported Income
This case involves an innocent spouse claim filed under Section 6015(c). The question for the court was whether the wife met the requirements for relief under Section 6015(c), specifically whether she had actual knowledge of the items of underreported income.
The court found that the wife did not have actual knowledge of the transaction giving rise to the unreported income, as she was unaware of the payments made to her husband’s businesses and her husband also testified that he himself did not have actual knowledge of the payments.
Additionally, the court found that the argument that the wife benefited from the unreported income is irrelevant to the relief provided by Section 6015(c) as there is no requirement for the requesting spouse to be innocent of benefit for proportionate relief.
This is the fundamental concept of Section 6015(c). Relief under this section is an unwinding of the joint return and holds the person liable only for their share of the taxes.
The Takeaway
This case highlights the importance of understanding the nuances for relief under Section 6015(c) and the difference between this provision and traditional innocent spouse relief under Section 6015(b) and equitable relief under Section 6015(f) before submitting a claim for innocent spouse relief. It also serves as a reminder that the spouse who is not requesting relief can challenge the request and, if they do, it helps if they do not know what arguments to make in response to this particular type of relief, as in this court case.