- 25.15.3.1 Introduction IRC § 6015
- 25.15.3.2 Election for Relief under IRC § 6015
- 25.15.3.3 Notification to Nonrequesting Spouse (NRS) per IRC § 6015(h)
- 25.15.3.4 Terms and Definitions
- 25.15.3.5 Special Considerations
- 25.15.3.6 IRC 6015(b) — Innocent Spouse Relief Qualifications
- 25.15.3.7 IRC 6015(c) – Election to Allocate a Deficiency
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This section discusses the innocent spouse provisions of IRC 6015 which provide three avenues for relief from joint and several liability:
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IRC 6015(b), Innocent Spouse Relief, provides an election for relief from an understatement of tax liability.
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IRC 6015(c), Separation of Liability, provides an election to allocate a deficiency .
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IRC 6015(f), Equitable Relief, provides IRS with discretion to grant equitable relief from deficiencies and underpayments if the relief provisions under IRC 6015(b) or IRC 6015(c) do not apply.
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IRC 6015(e) was amended by the Tax Relief and Health Care Act of 2006 on December 20, 2006, so that most claims for relief made solely under IRC 6015(f) result in a prohibition on collection and a suspension of the collection statute just as elections under (b) and (c) always had (see IRM 25.15.1.8 for a more detailed discussion of the suspension of the collection statute). As a result, the Service revised Form 8857 as of June 2007 to no longer ask a RS to specifically request under which subsections of section 6015 the RS is seeking relief. Instead, the Service will consider relief under subsections (b), (c), and (f) when a claim for relief is received on the Form 8857 with a revision date of 6/2007.
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Because of the amendment to IRC 6015(e) and the revision to Form 8857, consider a RS’s claim for relief under all subsections of IRC 6015 no matter which revision of Form 8857 is used by the RS, even if the RS used a prior version of Form 8857 and only checked the box indicating equitable relief under IRC 6015(f).
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For claims for relief that have already been filed using an old version of Form 8857 for which the RS only requested relief under IRC 6015(f), if the claim is still under consideration then consider relief under subsections (b) and (c) without asking the RS to make an affirmative election or even if the RS was asked to make an affirmative election but failed to do so.
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If a RS requests relief under IRC 6015(b) or 6015(c) on an old version of Form 8857, the examiner shall consider all possible relief provisions that might apply even if the RS requests relief under only one provision. When relief is denied under subsections (b) and (c), equitable relief under subsection (f) will be considered even if it was not specified by the RS.
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A RS may only withdraw a request for relief prior to the issuance of a preliminary determination letter.
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The NRS must receive notice of, and an opportunity to participate in, any proceeding with respect to an election of relief from joint and several liability under IRC 6015.
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Examiners shall issue an administrative proceeding notice ( Letter 3284) to the NRS giving a 30 day response time.
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Notice to the NRS is not required to be sent certified mail but must be sent to the NRS's last known address.
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Examiners shall notify the NRS of the preliminary determination made, and the right to an administrative appeal when relief is fully or partially allowed to the RS. The NRS may file a protest and request an Appeals conference, see Rev. Proc. 2003–19 , Rev. Proc. 2003–1 CB 371.
Note:
It is not necessary to provide appeal rights to the NRS if the tax liabilities at issue were discharged in the NRS's bankruptcy proceedings.
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If relief is denied in full, inform the NRS that he/she will be contacted if the RS protests the determination.
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When abuse is alleged, the Cincinnati Centralized Innocent Spouse Operation (CCISO) will send the RS a notification letter informing them the NRS will be notified and given an opportunity to participate. CCISO will hold the claim pending a response from the RS. The letter informs the RS of the following options:
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Should they want to proceed, the notification letter to the NRS will be sent from CCISO as an added precaution to conceal the RS's geographic location. The RS’s new name, address, telephone number, or employer will not be used in correspondence to the NRS. CCISO will refrain from sending the notification letter to the NRS pending a response from the RS. They will forward any response to the unit or area working the claim. The preliminary determination letter to the NRS will also be issued by CCISO.
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If the RS does not want CCISO to contact the NRS, they need to withdraw their claim as indicated in the letter. If the RS does not withdraw, continue processing.
Note:
This is not necessary for claims filed on Form 8857 revised June 2007.
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For claims originating in an Area office, the examiner will contact the RS to determine if there is a need to take additional precautions to conceal the RS’s location. If so, the area examiner will send a cover letter with Letter 3284 to the NRS stating they have been notified of the Innocent Spouse claim and will be working the issue along with the other exam issues. The RS’s new name, address, telephone number, or employer must not be used in correspondence to the NRS. The NRS should be given 30 days to respond.
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The following are definitions of terms used throughout this IRM section.
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The term understatement is defined as ;
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the excess of the amount of the tax required to be shown on the return for the taxable year, over
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the amount of tax imposed which is shown on the return, reduced by any rebate (within the meaning of IRC 6211(b)(2)). See IRC 6662(d)(2)(A).
For IRC 6015 purposes, a deficiency and understatement are the same. A RS can be considered for relief under IRC 6015(b), IRC 6015(c), and IRC 6015(f) for a deficiency/understatement.
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An item is that which is required to be separately listed on an individual income tax return or any required attachments. Interest and dividends from the same source are considered separate items. Items include, but are not limited to, gross income, deductions, credits, and cost basis. Penalties and interest are not erroneous items and relief from penalties and interest follows relief granted on the underlying item(s). Likewise, penalties and interest based on an underpayment of tax are also not separate items eligible for relief, and instead, follow any relief provided to the RS on the underlying underpayment. Thus, if a RS is eligible for relief from tax, the RS is also eligible for relief from the corresponding penalties and interest. But if a RS is not eligible for relief from the tax, the RS also remains liable for the penalties and interest. Although no relief is available separately for penalties under IRC 6015 , under the right circumstances penalties (not interest) may be abated or waived for reasonable cause or other penalty relief provisions. If a RS only requests an abatement of penalties follow the procedures in IRM 25.15.7.6.8(4).
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An erroneous item is any item resulting in an understatement or deficiency in tax to the extent such item is omitted from, or improperly reported (or improperly characterized) on, an individual income tax return. Some examples would be:
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Unreported income from an investment asset resulting in an understatement or deficiency in tax
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Ordinary income improperly reported as capital gain resulting in an understatement or deficiency in tax
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A deduction for an expense that is personal in nature that results in an understatement or deficiency in tax
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An improperly reported item that affects the liability on other returns.
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An underpayment is an unpaid amount due from self-assessed taxes on either an original or amended return. A RS can only be considered for relief under IRC 6015(f) for an underpayment.
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If the taxpayer signed a report or amended return and a statutory notice of deficiency was not issued and the tax was not full paid, treat as an underpayment.
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Overstated withholding is considered an underpayment of tax and qualifies for consideration only under IRC 6015(f). It does not matter whether the overstated withholding was refunded or not.
Example:
Tax on original return
Withholding claimed
Refund
$ 6,000
10,000 (actual = $0)
$ 4,000Automated Underreporter (AUR) operations issued a CP 2000 notice to reverse the withholding, resulting in $10,000 owed. The $10,000 owed is an underpayment. The taxpayer can request relief under IRC 6015(f), but not (b) or (c) for the full $10,000. The examiner should consider who received and benefited from the $4,000 refund when making a determination as to relief. -
IRC 6201(a)(3) allows the Service to immediately assess the liability resulting from overstated withholding. Thus, if the overstated withholding was refunded, there should be a TC 290 assessment in the amount of the overstated withholding on the taxpayer’s module. The existence of the TC 290 should be verified as soon as the claim is accepted for processing. If the TC 290 is not there and the ASED has not expired (which is generally three years from the filing date of the return) then action should be taken to have the assessment made before the ASED expires. If the ASED has expired, then the Service’s collection alternatives are limited. An erroneous refund suit can be considered if conditions for such a suit are met. Any questions should be immediately referred to Chief Counsel.
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A taxpayer’s filing status on an SFR will be either single or married filing separately. The Service cannot elect joint filing status for married taxpayers; thus, there will not be joint liability, and there can be no relief under IRC 6015 from a liability due to an SFR. The taxpayer may later file a joint return with his/her spouse. It is not until this joint return is filed that relief under IRC 6015 can even be considered. The important thing to remember when determining whether relief under IRC 6015(b), IRC 6015(c), or IRC 6015(f) is available is the type of liability (underpayment v. understatement) generated by the joint return.
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If the Service filed an SFR for a non-filer spouse and took no action against the other spouse and the spouses later file a joint tax return before the issuance of a Statutory Notice of Deficiency, this joint return should be considered the spouse's original return for purposes of relief under IRC 6015. If the joint return properly reported all income but was not accompanied by full payment of the tax liability, the liability is an underpayment (self-assessed tax). Thus, if either the non-filer spouse or the other spouse requests relief under IRC 6015 for this joint liability, only relief under IRC 6015(f) can be considered. If the joint return underreports income, and the Service determined a deficiency, then IRC 6015(b) , IRC 6015(c), and IRC 6015(f) can be considered for either spouse for the portion that is a deficiency.
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If the Service filed an SFR for a non-filer spouse (and took no action against the other spouse) and an assessment was made following a Statutory Notice of Deficiency, the resulting amount owed by the non-filer spouse is a liability due to a deficiency assessment. However, since no joint election was made, the taxpayer’s liability is not eligible for relief under IRC 6015. If the non-filer spouse and the other spouse later file a joint return that properly reported all income but was not accompanied by full payment of the tax liability, the liability should be considered an underpayment. Thus, if either the non-filer spouse or the other spouse requests relief under IRC 6015 for this joint liability, only relief under IRC 6015(f) can be considered. If the joint return underreports income, and the Service determines a deficiency, then IRC 6015(b) , IRC 6015(c), and IRC6015(f) can be considered for either spouse for the portion that is a deficiency.
Note:
This is a change in how the Service treats these claims. Previously, the Service treated the joint return as not changing the character of the assessment from a deficiency to an underpayment, even if the assessed tax is later abated or adjusted to reflect the tax on the joint return filed. This change was made because when the Service and the taxpayers agree that the amount of tax reported on the return is correct (which is the case here when the spouses file a joint return that the Service accepts and processes), the definition of understatement from See IRM 25.15.3.4.1.(1) - the excess of the amount of the tax required to be shown on the return for the taxable year, over the amount of tax imposed, which is shown on the return – results in an understatement of $0. The fact that there was a prior deficiency assessment against the non-filer spouse may still come into play in that it gives the Tax Court jurisdiction under the previous version of IRC 6015(e) before the amendments in December 2006 if the non-filer spouse petitions the denial of relief.
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If the Service filed an SFR for a non-filer, and the taxpayer and the taxpayer’s spouse sign an examination report or similar waiver agreeing to the tax prior to the issuance of a Statutory Notice of Deficiency, the tax liability is considered a self-assessed tax. The same result would occur if the liability originated from the AUR unit.
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The RS must file a claim for relief under any subsection of IRC 6015 with the Service no later than two years from the date of the first collection activity against the RS after July 22, 1998, with respect to the joint tax liability. Collection activity against the RS means collection against property in which the RS has an ownership interest (other than solely through the operation of community property laws), including property owned jointly with the NRS. Because not all events that involve the Service’s attempt to collect the liability will trigger the two-year period, examiners should exercise caution when determining if a section 6015 claim is time barred. Collection activity for this purpose should not be confused with "prohibited collection actions. " See IRM 25.15.3.4.5..
Note:
Per IRC 7502, timely mailing is treated as timely filing, so when the claim received date is over the two year time frame look at the postmark date. If the postmark date is prior to the two year time frame consider the claim timely.
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The following actions by the Service constitute collection activity:
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Refund offsets: The offset of an overpayment of the RS against the joint liability under IRC 6402 constitutes collection activity. See Campbell v. Commissioner, 121 T.C. 290 (2003).
Note:
In McGee v. Commissioner, 123 T.C. 314 (2004), the Tax Court held that a section 6402 offset alone will not trigger the two-year period for filing a claim unless the Service at the time of the offset notifies the RS of his or her right to file a claim for relief under section 6015. Prior to this court decision, the Service did not routinely notify taxpayers of their right to file a section 6015 claim at the time of the offset. On or about March 7, 2005, the Service began to provide this notice by including Publication 1 as a stuffer with all refund offset notices, and in August 2005, the offset notices themselves included language explaining the taxpayers’ right to file a section 6015 claim. Thus, if the offset occurred prior to March 7, 2005, you should consider the claim to be timely unless there is evidence that the Service notified the RS, or the RS was otherwise aware, of his or her right to file a section 6015 claim at the time of the offset.
Note:
Now that more than two years have elapsed since Publication 1 started being a stuffer with the refund offset notice and/or the refund offset notice itself stated containing language explaining the taxpayers' right to file a section 6015 claim, careful attention should be made to cases in which the Service offset a refund in April 2005 or later, especially those refunds offset after August 2005. If the Form 8857 was filed more than two years after such offset, the claim should be denied.
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Section 6330 notices: For claims filed on or after July 18, 2002, the sending of a section 6330 notice to the taxpayer will trigger the two-year period. A section 6330 notice is the notice sent pursuant to section 6330 which provides the taxpayer with notice of the Service's intent to levy and of their right to a collection due process (CDP) hearing. The same rationale that applied refund offsets in the McGee case would also apply to CDP Notices. Thus a CDP Notice will not start the two-year period for filing a section 6015 claim unless the CDP notice informs the taxpayer of the taxpayer's right to file a claim under IRC 6015. The Service has been informing taxpayers of the innocent spouse claim process through the inclusion of Publication 594 as a stuffer with the CDP Notice (either LT11 or Letter 1058). Over the years the discussion of the innocent spouse claim process in Publication 594 has improved. Based on the language discussing innocent spouse relief in Publication 594, Chief Counsel has determined that it will no be able to defend a denial of relief under IRC 6015 that is based on the two-year period for filing such a claim starting from a CDP notice issued with a version of Publication 594dated prior to May 2002. Thus in cases where the Form 8857 was filed more than two years after a CDP Notice issued prior to May 2002, the Service should treat the claim for relief as being timely filed unless another collection activity occurred more than two years prior to the filing of the innocent spouse claim.
Example:
The claim for relief was filed on September 1, 2005, and the Section 6330 notice was issued January 3, 2002. Although the claim for relief was filed more than two years after the issuance of the CDP Notice, this claim should be treated as timely filed because the notification of the taxpayer's right to file an innocent spouse claim that was included with the CDP Notice was not sufficient. If, however, the CDP Notice was issued on January 3, 2003, then the discussion of the innocent spouse claim process in Publication 594 would have been sufficient to start the two-year period. Thus, the election or request for relief must have been made by January 3, 2005. As the Form 8857 was not received until September 1, 2005, the claim is not timely filed.
For claims filed prior to July 18, 2002, the actual levy or seizure constitutes the collection activity, and the two-year period runs from the date of the levy or seizure.
Note:
For claims for relief filed on or after July 18, 2002, a TC 971 AC 069 on TXMOD, which represents the issuance of a section 6330 CDP Notice dated May 2002 or later will be considered the date from which the two-year period runs. In situations where the CDP notice is returned undeliverable, which is indicated on TXMOD by a separate and later Action Code 068, the two-year period is not considered to have started at all. This should not be confused with a separate and later Action Code 067, which indicates the Notice was refused or unclaimed. This does start the running of the two-year period, as of the date of the earlier AC 069.
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The filing of a suit by the United States against the RS for the collection of a joint tax liability : Triggers the two-year period. If a collection suit was filed, the two-year period will begin to run from date the suit is filed. See Treas. Reg. § 1.6015-5(b)(4), example 4. The transcript will not state that a collection suit has been commenced by the Department of Justice (DOJ). When an examiner sees a general litigation code (TC 520 with appropriate closing code) with a date more than two years before the claim is filed on a transcript, the examiner should investigate to determine if the DOJ has commenced a collection suit against the RS (or filed a claim in a court proceeding to collect the RS's property more than two years before the claim was filed). It should be noted that a collection suit cannot be commenced in Tax Court. Thus, if the examiner sees a Tax Court litigation code (TC 520 with a 72 or 74 closing code), the examiner does not need to investigate any further (although that could be an indication that this matter was tried before, which could mean that the claim is barred by res judicata). See IRM 25.15.3.5.2.
Note:
Although a complaint filed in a suit to reduce tax assessments to judgment or to foreclose the tax lien may not list specific assets the Service wishes to collect from, the two-year period begins to run if the RS is named as a defendant in the suit..
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Claims in judicial proceedings: The filing of a claim by the Service in a court proceeding in which the RS is a party, or which involves the property of the RS, including claims in bankruptcy and claims in interpleader (a legal procedure to determine which of the two persons bringing the same suit against a third person is the rightful claimant) actions involving property of the RS also triggers the two-year period.
Example:
Proof of claims filed in bankruptcy. The examiner should look at the transcripts to see if a bankruptcy litigation code is present more than two years before the section 6015 claim was filed. If this situation is present, the examiner should investigate to determine if the Government filed a proof of claim (POC). First, the examiner should contact the bankruptcy unit that handled the bankruptcy case. This office should be able to obtain information regarding whether a POC was filed. If a POC was filed, the examiner should try and obtain from the Insolvency unit a file stamped copy of the proof of claim, along with any documentation that would establish who was served with a copy of the proof of claim, and at what address.
Example:
Claims in other proceedings. Again, a general litigation code on the transcript indicates a possible claim in a judicial proceeding. If the general litigation code appears on the transcript, the examiner should contact the Chief Counsel attorney who handled the case to discuss whether a collection suit, discussed above, or claim in another proceeding was filed. The Chief Counsel attorney should be able to ascertain whether a claim was ever filed, and if so, the date the claim was filed. The two-year period will begin on the date the claim was filed. In these situations, the examiner should request that the field attorney provide the examiner with copies of any documentation which establishes the date that the RS was served with a copy of the claim.
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"Collection activity " does not include the following IRS actions:
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Notices of deficiency;
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Demands for payment of tax; and
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Notices of Federal Tax Lien;
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There may be cases in which there has been no collection activity as described above, even though the RS may have received numerous demands for payment or other generic notices. Thus, the 2 year period for filing a claim for relief under section 6015 may not expire on certain old and inactive balance due cases.
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IRC 6015(e)(1)(B) generally prohibits levies and judicial proceedings while a claim is pending. Refund offsets are not prohibited by statute. However, the Service has made a business decision not to offset refunds while a claim is pending.
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If a prohibited collection action or a refund offset has occurred in violation of paragraph 1 above, corrective measures must be taken to refund the money to the RS. Only Collection has authority to release levy payments.
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Prior action on a given tax year may affect whether a request for relief from joint and several liability can be considered. These actions are defined below.
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The principles of res judicata, which is discussed in See IRM 25.15.3.5.1. and collateral estoppel which is discussed in See IRM 25.15.3.5.2., are not limited to Tax Court decisions. These doctrines also apply to other court decisions.
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Res Judicata - Res judicata generally precludes any kind of claim for a tax year previously litigated. In the case of any claim for relief under subsection or section 6015, if any court has rendered a final decision on the RS's tax liability for a tax year, such decision shall be conclusive if relief under IRC 6015 was at issue in the prior case or if the RS meaningfully participated in the proceeding and the RS could have raised relief under IRC 6015 in that proceeding. See IRC 6015(g)(2).
Note:
A RS has not meaningfully participated in a prior proceeding if, due to the effective date of IRC 6015, relief under IRC 6015 was not available in that proceeding.
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Final Tax Court Decision Prior to July 22, 1998 - A taxpayer who has unsuccessfully litigated his/her entitlement to innocent spouse relief under the prior law of IRC 6013(e) may elect relief under the new provision of IRC 6015 for the same year if a portion of the tax liability remains unpaid as of July 22, 1998. See IRC 6015(g)(2) and Treas. Reg. § 1.6015-1(e).
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Final Tax Court Decision on or after July 22, 1998 — If the issues creating the deficiency were the subject of a prior Tax Court decision entered on or after July 22, 1998, and the spouse seeking relief did not raise the issue of his/her eligibility for relief under IRC 6015 in that proceeding, the spouse may not raise it subsequently if the court determines the RS "participated meaningfully" (actively participated) in the prior proceeding. See Treas. Reg. §1.6015–1(e).
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Res Judicata and Bankruptcy - Not all bankruptcy proceedings determine the merits of the tax liability; some bankruptcy proceedings merely determine the collectability of the tax liability. If the merits of the tax liability were at issue in the bankruptcy proceeding, the RS meaningfully participated in the proceeding, and relief under IRC 6015 was raised or could have been raised, then res judicata applies and the RS is precluded from raising a subsequent request for relief under IRC 6015. If the merits of the tax liability were not at issue during the bankruptcy proceeding, res judicata will not apply and the RS will not be barred from making a subsequent request for relief under IRC 6015.
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Collateral Estoppel is a legal doctrine, which holds the findings of fact of a prior judicial decision are binding on the parties if the facts are unchanged. The taxpayer would be restricted from litigating a material fact of an issue previously litigated.
Example:
If the Tax Court found the taxpayer was not entitled to IRC 6013(e) relief because he or she had reason to know of the understatement of tax under IRC 6013(e), the taxpayer could not re-litigate the reason to know element under IRC 6015(b). However, the taxpayer could re-litigate the denial under IRC 6015(c) as it requires actual knowledge rather than reason to know as a basis for denying relief.
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Refer to LEM 25.15.1.4 for information on circumstances that allow for issuance of a second final determination letter.
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Refer to IRM 25.15.1.2.7 for information on Offer in Compromise accepted prior to the filing of the Form 8857, Request for Innocent Spouse Relief.
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A closing agreement, Form 866, Agreement as to Final Determination of Tax Liability, closes the tax year and the type of tax to which it relates with finality. See Treas. Reg. § 301.7121-1(c). If a taxpayer signed a Form 866, he or she is precluded from consideration for relief from joint and several liability.
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A closing agreement, Form 906, Closing Agreement on Final Determination Covering Specific Matters, will generally relate to a specific matter or matters for a tax period, rather than to the entire liability. Only those matters covered in the closing agreement are conclusively closed. A taxpayer may request innocent spouse relief for adjustments not specifically covered in the closing agreement.
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If the RS was not a party to the Closing Agreement, using either Form 866 or Form 906, then the RS may file an innocent spouse claim for that year if the RS is otherwise eligible.
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Execution of a Form 870-AD , Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment by the RS is not considered a closing agreement and does not preclude consideration for relief.
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TEFRA Settlement Agreements are addressed at IRM 25.15.1.2.8.
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To qualify for Innocent Spouse relief under IRC 6015(b), the RS must establish each of the following elements:
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A joint return was filed for the year in which relief is requested;
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There is an understatement of tax ( See IRM 25.15.3.4.1) attributable to erroneous items of the NRS;
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The RS did not know and had no reason to know of the understatement at the time the return was signed;
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Taking into account all the facts and circumstances it would be inequitable to hold the RS liable for the deficiency attributable to the understatement; and
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The request for relief is made within 2 years from the date of the first collection activity (with respect to the RS) after July 22, 1998.
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The first requirement is that there must be a joint return filed for the year for which relief is requested. If a joint return was not filed, relief under IRC 6015(b) is not available.
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The second requirement provides there must be an understatement of tax attributable to erroneous items of the NRS. Attribution is a critical factor. Items attributable to the RS do not qualify for relief. You cannot be relieved of tax on your own items including joint items. In most cases examiners should first consider attribution before other factors.
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Math errors under IRC 6213(g)(2) are generally considered to be deficiencies for innocent spouse purposes of determining relief under IRC 6015. However, math error adjustments to withholding and estimated tax are not considered deficiency assessments. See IRC 6211(b)(1) and IRM 25.15.7.6.15.
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See IRM 25.15.3.4.1 for a definition of an understatement of tax.
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See IRM 25.15.3.4.1.2. for a definition of an erroneous item.
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The third requirement under IRC 6015(b) is that the RS did not know and had no reason to know of the understatement at the time the tax return was signed.
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There are 2 standards that must be considered under this requirement:
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Lack of Actual knowledge ("did not know" ); and,
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Lack of Constructive knowledge (" had no reason to know" ).
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The examiner should consider the following factors (but, not limited to):
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Age of the taxpayer;
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Education level;
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Degree of control/participation in the household finances;
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Extent of participation or involvement in the activity that gave rise to the erroneous item; and
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Lifestyle during the tax period covered by the understatement, compared to the income reported.
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See Treas. Reg. § 1.6015-2.
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The fourth requirement under IRC 6015(b) provides that, considering all the facts and circumstances, it is inequitable to hold the RS liable for the deficiency.
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A determination of whether it is inequitable to hold the spouse liable is based on factors developed in prior case law under IRC 6013(e). See IRM 25.15.3.8 for a further discussion of Equitable Relief under IRC 6015(f).
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The fifth requirement under IRC 6015(b) is that the RS must make an election under IRC 6015(b) within 2 years from the first collection activity against the RS that occurred after July 22, 1998. See IRM 25.15.3.4.4 for the definition of collection activity.
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Partial relief may be granted when a spouse meets all of the other conditions for innocent spouse, except he or she had knowledge of, or reason to know of, some part of the understatement. IRC 6015(b) specifically allows partial relief from liability (including penalties, interest and other amounts) to the extent of the lack of knowledge and reason to know of the understatement. See Treas. Reg. § 1.6015–2(e).
Note:
The knowledge requirement applies to each item of adjustment and to the extent of the knowledge of each erroneous item.
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An individual may elect to allocate a deficiency under IRC 6015(c).
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Both parties to a joint return may elect to allocate a deficiency. If only one spouse elects to allocate the deficiency, the liability of the NRS is not affected. The NRS would still be liable for the entire deficiency.
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The election to allocate applies only to deficiencies.
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If granted, the RS is relieved in whole or in part of the joint and several liability for the deficiency. The items giving rise to the deficiency are allocated in the same manner as they would have been if the spouses had filed separate returns. The analogy to separate returns goes to the allocation of items adjusted, not to the computation of allocable tax due to a separate return.
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The allocation is made without regard to community property law.
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To qualify for relief under this provision, the RS must establish:
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A joint return was filed for the year in which relief was requested.
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There is a deficiency of tax attributable to erroneous items of the NRS. A spouse may be relieved for a portion of the tax liability arising from a joint item.
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He or she is either divorced, widowed, legally separated, or living apart for the 12 month period prior to the date the request was filed. Living apart for the 12 month period prior to the date the request was filed does not include a spouse who is temporarily absent from the household. A temporary absence exists if it is reasonable to assume the absent spouse will return to the household, or a substantially equivalent household is maintained in anticipation of such a return. Some examples may include absence due to incarceration, illness, business, vacation, military service, or education. The regulations provide the marital status of a deceased RS will be determined on the earlier of the date of election or the date of death in accordance with IRC 7703(a)(1). The regulations also clarify a husband and wife who reside in two separate dwellings are considered members of the same household if the spouses are not estranged, or one spouse is temporarily absent.
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The request for relief is made within 2–years from the date of the first collection activity (with respect to the RS) after July 22, 1998. The 2–year time period for making the election is the same as required under IRC 6015(b). See IRM 25.15.3.6.5.
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In order to invalidate an allocation the election under IRC 6015(c), the IRS has the burden of proving by preponderance of the evidence that the RS had actual knowledge of the items giving rise to the deficiency at the time the return was signed.
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This differs from the standard for relief under IRC 6015(b) which places the burden on the RS to establish he or she did not know and had no reason to know of the understatement. "Did not know" and "had no reason to know" are sometimes referred to as actual and constructive knowledge, respectively. A spouse who was disqualified for innocent spouse relief due to constructive knowledge under IRC 6015(b) may qualify for relief under IRC 6015(c) if he or she did not have actual knowledge.
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In an omitted income case, actual knowledge includes knowledge of the receipt of the income. Knowledge of only the source of the income is not sufficient. Actual knowledge in an erroneous deduction or credit case means knowledge of the facts that made the item not allowable as a credit or a deduction. For example, in an erroneous deduction case involving disallowed deductions generated by a partnership, the Service must establish that the RS had actual knowledge of the factual circumstances which made the partnership items erroneous deductions. See Treas. Reg. § 1.6015–3(c)(2).
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Actual knowledge of a portion of the deficiency does not make the spouse ineligible for IRC 6015(c) relief for the entire deficiency. It merely invalidates the allocation with respect to the specific items for which the spouse had actual knowledge.
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The allocation must be made according to the procedures contained in IRC 6015(d). The allocation takes into consideration limitations in IRC 6015(c) .
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The following is a seven step approach to allocating understatements between the joint and several liability and each spouse individually. In general, items for which the RS is granted relief are re-allocated from the joint liability to the NRS individually. Items for which relief is not granted remain part of the joint and several liability. The seven steps are summarized in the following paragraphs.
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Step 1— Determine the total deficiency for the joint return with all adjustments.
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Step 2 — Identify and allocate separate treatment items (credits and taxes other than tax imposed by IRC 1 or IRC 55 ). See IRM 25.15.3.7.2.2.1.
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Step 3 — Compute the total allocable deficiency.
Total deficiency -/+ Separate treatment items = Total Allocable Deficiency
This is the joint deficiency (Step 1) adjusted for separate treatment items (Step 2). This is done in order to allocate income tax before credits and other taxes. Therefore, disallowed credit items are subtracted from the total deficiency. Other taxes increased are also subtracted from the total deficiency. When applicable, credit items increased and other taxes decreased are added back to the total deficiency.
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Step 4 — Allocate all adjustment items between the spouses. The allocation takes into account the following considerations, discussed in further detail below:
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Actual knowledge bars relief for the item.
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Fraudulent transfers invalidate election.
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RS bears burden of proof for establishing the portion of deficiency allocable to them.
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Allocate as if spouses filed separate returns.
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Ignore separate return limitations.
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Tax benefit limitation.
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IRS may allocate as appropriate when understatement due to fraud.
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No relief for items attributable to RS.
Note:
A RS can obtain relief from his or her own item to the extent that the RS does not receive a tax benefit from the item and the item offsets the NRS's income. See Hopkins v. Commissioner 121 TC 73 (2003). In these instances the Service must establish that the RS had actual knowledge to invalidate the allocation to the NRS or the RS will be able to obtain relief.
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Step 5 — Compute the allocable deficiency for each spouse. This is the portion of the total allocable deficiency (Step 3) allocated to each spouse using the ratio of the adjustment items allocable to the spouse (Step 4) over the total of all allocable adjustment items.
Deficiency Allocable to a Spouse =