Innocent Spouse Relief

By Carol Markman, CPA

Editor: John L. Miller, CPA

Searching the Internet under “innocent spouse relief” will turn up many organizations, CPAs, attorneys and others offering to assist a taxpayer with an innocent spouse claim. IRS Pub. 971, Innocent Spouse Relief (And Separation of Liability and Equitable Relief), explains the various types of relief, who may qualify and how to apply. Although the current innocent spouse rules under Sec. 6015 have been effective for determining unpaid balances due the IRS as of July 22, 1998 and Federal tax liabilities arising after that date, many cases have recently been decided by the Tax Court and district courts.

In her 2006 annual report, Nina Olson, the National Taxpayer Advocate, included innocent spouse cases as among the most litigated; see National Taxpayer Advocate’s 2006 Annual Report to Congress.

An analysis of recent cases reveals that the Service interprets the rules as narrowly as possible. This is especially true of the “equitable” relief cases using Sec. 6015(f), which Congress intended for cases that do not fit the other two forms of innocent spouse protection: innocent spouse relief and relief by separation of liability.

Taxpayer Losses

The Tax Court has supported the IRS’s rulings against taxpayers in many equitable relief cases, including Madden, TC Memo 2006-4, Motsko, TC Memo 2006-17, and Lopez, TC Memo 2005-36. The Tax Court denied relief even though the taxpayers in the cases might suffer economic hardship.

The Tax Relief and Health Care Act of 2006 (TRAHCA ’06) amended Sec. 6015 specifically to give the Tax Court jurisdiction to review innocent spouse cases claiming equitable relief and to suspend the statute of limitations while such claims are pending. This provision may change the dynamic in some of these cases.

Until the TRAHCA ’06 was passed, Sec. 6015(e) gave taxpayers the option to petition the Tax Court to review denials of innocent spouse relief and relief by separation-of-liability cases, but not equitable relief cases. However, in Capehart, 11/7/06, the Ninth Circuit ruled that the Tax Court properly determined the taxpayer was not eligible for Sec. 6015(b) relief from joint liabilities arising from tax shelter investments, because she played a substantial role in managing the investments in question.

Taxpayer Victories

Partial: Sometimes the taxpayer prevails in part. In Levy, TC Memo 2005-92, the court held that the IRS abused its discretion in denying the taxpayer Sec. 6015(f) equitable relief from joint liabilities for five years of understatements attributable solely to her ex-husband. The court found that although the taxpayer significantly benefited from unpaid liabilities and failed to show that she would suffer economic hardship if not granted relief, she had no knowledge or reason to know, at the time she signed the returns, that her ex-husband would not pay those tax liabilities.

Complete: Sometimes the taxpayer wins outright. In Campbell, TC Memo 2006-24, the court ruled that a nurse/homemaker was entitled to Sec. 6015(b) relief from over $2.8 million of liabilities attributable to her husband’s sham commodities-trading transaction. It was deemed highly inequitable to hold her liable, given her lack of knowledge, lowered standard of living, age and relatively modest assets. The court rejected the Service’s argument that the taxpayer misled by not fully disclosing account ownership.

In DeFore, TC Summ. Op. 2004-162, a husband qualified for innocent spouse relief under Sec. 6015(c), despite having reason to know that his wife had understated her income. Proportionate relief was appropriate, as he was no longer married and did not have actual knowledge when signing the return of any of the items giving rise to the deficiency. Because the tax understatement was attributable entirely to the wife’s omitted income, the entire deficiency was allocated to her.

In Cook, TC Memo 2005-22, the taxpayer qualified for innocent spouse relief under Sec. 6015(c), even though she prepared invoices for the omitted income. She had been subjected to physical and emotional abuse throughout her marriage. The court concluded that she lacked actual knowledge of the unreported income and qualified for relief from joint liability.

Similarly, in Neal, TC Memo 2005-201, the taxpayer was held entitled to Sec. 6015(f) relief from joint liabilities. In McClelland, TC Memo 2005-121, the taxpayer was entitled to Sec. 6015(b) relief from liability for a deficiency arising from her and her husband’s false interest deduction. The court felt it would be inequitable under Sec. 6015(b)(1)(D) to hold her liable, because her husband had caused the false deduction and concealed it from her.

Overwhelming: Sometimes the taxpayer really wins. In Owen, TC Memo 2005-115, and Bulger, TC Memo 2005-147, the Tax Court held that a widowed taxpayer was entitled to reasonable administrative and litigation costs resulting from pursuit of a Sec. 6015(c) allocation claim for partial innocent spouse relief from joint partnership/tax-shelter-related liabilities. The IRS’s position, that the taxpayer did not qualify for allocation because of her alleged knowledge about items giving rise to deficiencies, was not substantially justified. The court held that the Service failed to apply a proper standard for evaluating actual knowledge, and did not investigate or account for the taxpayer’s detailed response indicating her lack of knowledge (which was bolstered by clear evidence that the partnership promoter had deceived all of the investors).


Claims for innocent spouse relief need to be very carefully and fully prepared before being sent to the IRS. The questions in Form 12507, Innocent Spouse Statement, should be used as a guide to determine whether a case has a reasonable chance of success. The answers should be prepared before Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), is submitted. Form 12507 should not be submitted until the Service requests it.

Mr. Miller is a member of the AICPA Tax Division’s IRS Practice & Procedures Committee. Mr. Dolan, Mr. Keenan and Ms. Markman are members of that committee. For further information about this column, contact Mr. Miller at .

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