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July 1, 2008

Innocent Spouse Relief for Ex-Spouse’s Income

Federal Income Tax

Houston Tax Attorney

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Innocent spouse relief can provide a much needed remedy for divorced or separated taxpayers who filed a joint income tax return.  This relief is commonly granted where the income that gave rise to the tax liability was earned by one spouse.  The recent Mapp v. Commissioner, T.C. Summary Opinion 2008-76, case provides an opportunity to consider these rules.

Facts & Procedural History

Mr. and Mrs. Mapp were married in 1980 and they were divorced in 2003.  Their divorce separation agreement specified that each of the separating spouses would be liable for income taxes on their income.

Mr. Mapp was self-employed as a truck driver.  In tax year 2000, Mr. Mapp did work for two trucking companies with similar names: Cornerstone Transportation, Atlanta and Cornerstone Transportation, South Carolina. Each corporate entity issued him a separate Form 1099.

The tax return preparer at H&R Block considered the Forms 1099 as duplicates and only included one in Mr. and Mrs. Mapps federal income tax return for tax year 2000. Mr. Mapp noticed the error, but hoped the IRS would not notice it.

In tax year 2002, Mr. Mapp did not remit sufficient estimated tax payments–which resulted in a tax balance being due.

Mrs. Mapp worked as a nurse and her income was reported on the federal income tax returns for tax years 2000 and 2002.

The IRS adjusted the 2000 and 2002 tax returns and issued a notice of deficiency to both Mr. and Mrs. Mapp.  Mrs. Mapp filed a request for innocent spouse relief, which the IRS denied.  Mrs. Mapp petitioned the U.S. Tax Court to ask it to review her innocent spouse relief.  Mr. Mapp intervened in the court proceeding.

Types of Innocent Spouse Relief

There are three types of innocent spouse relief.  One type provides full or apportioned relief from joint and several liability (Section 6015(b)). The second type provides proportionate tax relief to divorced or separated taxpayers (Section 6015(c)). The third type provides equitable relief from joint and several liability in certain circumstances if relief is not available under the other two types (Section 6015(f)).

Divorce or Separation Relief

The second type of innocent spouse relief is an election. The Section 6015(c) election treats the former spouses as if they had filed separate returns, and each spouse’s liability is limited to that portion of the deficiency properly allocable to the electing spouse.

Under Section 6015(c), a requesting spouse may elect to allocate a deficiency if the following four conditions are met:

(1) A joint return was filed;

(2) at the time of the election, the requesting spouse is no longer married to the nonrequesting spouse;

(3) the requesting spouse elects the application of Section 6015(c) no later than two years after the date on which collection activities have begun; and

(4) the deficiency remains unpaid. The requesting spouse must not have actual knowledge of “any item giving rise to a deficiency” which is not allocable to the requesting spouse.

The court concluded that Mrs. Mapp qualified for the second type of innocent spouse relief for the 2000 tax year.  This was based in large part on Mr. Mapps testimony.

Equitable Relief

The court also considered the third type of innocent spouse relief for the 2002 tax year. There are a number of requirements to qualify for this type of relief.

The third type of innocent spouse relief, which is described in Section 6015(f)(1), provides that a taxpayer may be relieved from joint and several liability if it is determined, after considering all the facts and circumstances, that it is inequitable to hold the taxpayer liable for the unpaid tax or deficiency. Rev. Proc. 2003-61,5 sec. 4.01, 2003-2 C.B. 296, 297, sets forth seven threshold conditions that the requesting spouse must satisfy before the Commissioner will consider a request for relief under Section 6015(f).

Rev. Proc. 2003-61, sec. 4.03, lists several factors to be evaluated for requests for relief under Section 6015 for spouses who filed a joint return (and have met the threshold conditions for relief under Section 6015(f)) but do not qualify for relief under Rev. Proc. 2003-61, sec. 4.02.

The nonexclusive list of factors to be considered includes:

(1) Marital status;

(2) economic hardship;

(3) no knowledge or reason to know of the item giving rise to the deficiency;

(4) whether the nonrequesting spouse had a legal obligation to pay the liability;

(5) whether the requesting spouse benefited significantly from the item giving rise to the deficiency; and

(6) whether the requesting spouse has made a good faith attempt to comply with the tax laws in subsequent years.

Id. sec. 4.03(2)(a).

The court concluded that Mrs. Mapp qualified for the third type of innocent spouse relief for the 2002 tax year.  This decision was based in large part on a belief that Mrs. Mapp was not aware of the estimated tax shortfall in 2002.

The Conclusion

Based on these factors, the court concluded that Mrs. Mapp was entitled to innocent spouse relief.  The court granted the requesting spouse innocent spouse relief for the nonrequesting spouse’s compensation that was not reported on the timely-filed income tax return and for the balance resulting from insufficient estimated tax payments.  This prevents the IRS from collecting the tax from the requesting spouse.

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