by Brian Mahany
Innocent spouse is a concept unique to the tax world. Ask anyone who is not a CPA or tax attorney about an “innocent spouse” and the answers will make you laugh. For those whose spouse cheated on taxes or fled town leaving them with a giant, unpaid tax bill, innocent spouse is no laughing matter.
To qualify for innocent spouse relief, you must prove:
– there was a joint tax return and an unpaid balance,
– the unpaid amount must be due to some action or omission of your spouse,
– you had no knowledge of the mistake or underpayment,
– it would be unfair to impose the tax on the “innocent spouse”, and
– relief must be requested within 2 years after the IRS began collection activity.
At least that’s what the IRS says on its website. The U.S. Tax Court disagrees and think innocent spouses should get even more leeway.
Although the rules make it look like an easy process, the IRS is usually tough on these cases. Frequently taxpayers must take their appeal all the way to tax court before getting any relief.
In a case decides this January (Stephenson v Commissioner), the Tax Court gave relief to the former wife from an abusive marriage. The service had denied her request forcing the woman to court.
According to the judge, Mrs Stephenson, the ex-wife, suffered learning disabilities and was routinely verbally and physically abused by her husband. The husband kept all financial records and the family’s checkbook under lock and key. He handled all finances. When Mrs. Stephenson attempted to leave the marriage, her husband grabbed a gun and threatened to kill her if she left.
Along the way, the husband made hundreds of thousands of dollars while his wife suffered. As can be predicted, the husband failed to pay income tax and the IRS came after both parties. Mrs. Stephenson filed for innocent spouse relief which was denied by the IRS. Thankfully, a judge quickly reversed the determination and released her from the liability.
In a rare move, the IRS’ own taxpayer advocate blasted the IRS handling of this case at an American Bar Association meeting. Advocate Nina Olson said, “I will do everything in my power to raise this to every single congressman and every single congresswoman and every single senator…”
The courts haven’t stopped there. Although the IRS still says that an innocent spouse application must be filed within two years of the start of collection activity, the court has thrown out that interpretation as well. Unfortunately, there is now a split among courts. Federal courts in Wisconsin continue to follow the minority view and support the narrow 2 year interpretation of the IRS.
What does this mean for taxpayers? If your spouse handled all the financials and hid his or her misconduct, you may be entitled to relief even though you signed a tax return with your spouse. The IRS plays hardball but a good tax attorney can help you get the issue before a judge. Many of the judges have been ruling in favor of innocent spouses. Time is of the essence, however. Wait too long and there may not be any relief.
The Wisconsin tax lawyers at Mahany & Ertl can help you anywhere in the United States if you have a tax problem. Innocent spouse? Offer in compromise? Unreported foreign accounts? Tax appeals? Collections? Welfare benefit plan scams? Call us, we can help.
Mahany & Ertl, LLC Milwaukee, Wisconsin; Detroit, Michigan & Portland, Maine. Services nationwide.