- 25.15.5.1 Overview
- 25.15.5.2 Community Property States
- 25.15.5.3 Treatment of Community Income in General
- 25.15.5.4 Domicile
- 25.15.5.5 Community Property
- 25.15.5.6 Community Income
- 25.15.5.7 IRC § 66(a), Separation of Spouses
- 25.15.5.8 IRC § 66(b) - Unjust Enrichment
- 25.15.5.9 IRC § 66(c) - Innocent Spouse Relief
- 25.15.5.10 Requesting relief under IRC § 66(c)
- 25.15.5.11 Time Period for Filing a Request for relief
- 25.15.5.12 Invalid Joint Return Elections
- 25.15.5.13 Assessment Against NRS if Relief Granted
- 25.15.5.14 Substitute for Return
- 25.15.5.15 Effect of Prior Closing Agreement or Offer in Compromise
- 25.15.5.16 Notification Requirement
- 25.15.5.17 Appeal of Denial of Relief
- 25.15.5.18 Refunds Under IRC § 66
- 25.15.5.19 Determination Letters
-
A spouse domiciled in a community property state is generally liable for income tax on one-half of the community income when they do not file a joint return. This section will discuss community property laws and outline the provisions of IRC § 66, which provide four exceptions to the rule community income is taxed one-half to each spouse.
-
IRC § 66 relief is not available if the spouse:
-
transferred assets to the other spouse as part of a fraudulent scheme,
-
entered into a closing agreement that disposes of the same liability, or
-
entered into an offer in compromise with respect to the liability.
.
-
-
For further information on Community Property Law not listed in this IRM, see IRM 25.18.1, Basic Principles of Community Property Law.
-
The following are community property states:
-
Arizona
-
California
-
Idaho
-
Louisiana
-
Nevada
-
New Mexico
-
Texas
-
Washington
-
Wisconsin
-
-
Community property laws vary greatly from state to state based upon each individual state’s statutes. The community property laws of the state where the spouses are domiciled are controlling and must be reviewed when any tax issue involves the application of community property laws.
-
Spouses domiciled in community property states generally have an undivided one-half interest in the community income so they ordinarily may either file jointly or separately. Their separate return should reflect one-half of the community income plus 100% of their separate income.
Note:
Taxpayers can with a prenuptial agreement opt out of state community property laws and elect to have income treated as if they were residence in a non-community property state in which case IRC § 66 would not apply.
-
Whether a taxpayer has community property and community income depends on the state of domicile. The words " residence" and "domicile" are not synonymous and are often confused. A taxpayer may have several places of residence, but has only one domicile. A domicile is a permanent home the taxpayer intends to use for an indefinite or unlimited period, and when absent, intends to return.
-
Objective factors are a good indication of the taxpayer’s intent. Such factors include:
-
Where the taxpayer is employed and registered to vote;
-
Where the taxpayer’s vehicles are registered;
-
Whether the taxpayer is on a temporary work detail;
-
Where the taxpayer’s personal residence is located;
-
How often the taxpayer returns home; and
-
Whether the taxpayer’s involvement and ties to the community are asserted where the domicile is located.
-
-
If both spouses have different domiciles, you should check the community property laws of each state to determine if they have community property or community income.
-
Community Property - Generally, community property is all property acquired during a marriage while the spouses are domiciled in a community property state. Additional guidelines listed below are the general rules regarding what constitutes community property:
-
Property both spouses agree to convert from separate to community property.
-
Property which cannot be identified as separate property.
-
-
Separate Property - For property to be considered separate after marriage, it must be acquired by separate funds. For property acquired before marriage to remain separate, the upkeep must be done by separate funds and the property must not be co-mingled.
-
Generally, community income is income generated from community property. Listed below are the general rules regarding what constitutes community income:
-
Income derived from community property.
-
Salaries, wages, or pay for the services of both spouses during the marriage.
-
Income from real estate treated as community property under the laws of the state where the property is located.
-
-
State law must be reviewed to determine the proper treatment for community income. Also, state law will determine how to treat community income if the spouses have separated during the year. Each state’s laws regarding community income and community property are different. Do not assume the general rules apply in every state.
-
IRC § 66(a) is not a relief provision but was intended to protect abandoned spouses. Spouses may choose to report their income in this manner assuming they meet all the requirements. IRC § 66(a) provides an exception to the general rule; community income is taxed one-half to each spouse domiciled in a community property state. This is a special rule that generally permits spouses to allocate earned income to the spouse who earned the income if certain statutory requirements are met. It applies where:
-
The spouses are married to each other at any time during the calendar year.
-
The spouses live apart at all times during the calendar year and do not file a joint return for the taxable year beginning or ending in the calendar year. For purposes of this requirement, living apart requires that spouses maintain separate residences.
-
One or both of the spouses have earned income for the calendar year, which is community income.
-
No portion of the earned income is transferred between the spouses, directly or indirectly, before the close of the calendar year. Transferred income does not include de minimis amounts of earned income transferred between spouses. Amounts transferred for the benefit of the spouses’ child are not treated as direct or indirect transfers of income.
-
-
If all of these criteria are met, spouses in community property states may report their income according to rules of IRC § 879(a) which provides:
-
Earned income (wages, salaries, and other forms of compensation for personal services) is taxed to the spouse rendering the services.
-
Trade or business income is taxed to the spouse exercising substantially all of the management and control of the business.
-
A distributive share from a partnership is taxed to the spouse who is the partner.
-
Income derived from the separate property of the one spouse is taxed to that spouse.
Caution:
All other forms of income are taxed in accordance with normal community property laws. This includes dividend, interest, rents, royalties, capital gains, and earning of unemancipated minor children.
-
-
As with IRC § 66(a) , IRC § 66(b) is not a relief provision. IRC § 66(b) provides another exception to the general rule that community income is taxed one-half to each spouse. IRC § 66(b) authorizes the Secretary and not the taxpayer to disregard community property laws by denying the benefits of income splitting between the spouses. IRC § 66(b) applies under certain prescribed conditions as shown below:
-
The spouse acted as if he/she was solely entitled to such community income, and
-
The spouse failed to notify the other spouse of the nature and amount of such income before the due date of the return (including extensions) for the year in which the income was derived.
-
-
IRC § 66(b) entitles the Secretary to assess additional tax against the spouse earning the income in accordance with the deficiency procedures in IRC § 6212 and IRC § 6213. The Service must determine whether IRC § 66(b) applies. This is not a relief provision.
-
Where IRC § 66(b) is asserted, it must be clearly reflected on the notice of deficiency.
-
IRC § 66(c) provides two additional exceptions to the general rule the community income is taxed one-half to each spouse. IRC § 66(c) provides relief from the operation of community property laws under certain circumstances. Unlike IRC § 6015, IRC § 66(c) provides relief for items of income only, not relief from disallowed deductions.
-
The first sentence of IRC § 66(c), known as traditional relief, applies only to deficiency cases. In cases where relief is granted, the taxpayer’s former spouse will be solely liable for the tax liability attributable to the item of community property income. The following must be met for relief to be granted:
-
The requesting spouse (RS) does not file a joint return for the taxable year for which the RS seeks relief;
-
The RS does not include in gross income for such taxable year an item of community income;
-
The community income item would be attributable to the other spouse in accordance with IRC § 879(a) ;
-
The RS establishes he/she did not know and had no reason to know of such item of community income; and
-
Considering all the facts and circumstances, it is inequitable to include such community item in the RS’s gross income.
-
-
If the RS does not qualify for traditional relief under the first sentence of IRC § 66(c), then the Service will consider equitable relief under the second sentence of IRC § 66(c).
-
Relief is available for both deficiency cases and underpayment cases.
-
The Service issued a revised guidance on the relief provision in Rev. Proc. 2003-61, 2003-32 IRB 296. Rev. Proc. 2003–61 is effective for relief requests filed on or after November 1, 2003. In addition, this revenue procedure is effective for requests where a preliminary determination letter has not been issued as of November 1, 2003. Rev. Proc. 2000–15 is still effective for all other requests for relief. For information on the factors to consider when determining whether equitable relief should be granted see IRM 25.15.3.8.2 . These guidelines should be applied in a consistent and nondiscriminatory manner. Decisions to grant relief should not be based on the subjective personal and social beliefs of the IRS employee or any other inappropriate grounds.
-
If it is inequitable to hold the RS liable for any unpaid tax or deficiency, the Secretary may grant relief. The equitable relief provision under IRC § 66(c) is available for spouses domiciled in a community property state, who did not file a joint return and who do not qualify for the traditional relief under the first sentence of IRC § 66(c), and who meet the following threshold requirements:
-
The RS must apply for relief no later than two years after the Service’s first collection activity after July 22, 1998, with respect to the RS
-
The non-requesting spouse (NRS) must not have transferred assets to the RS as part of a fraudulent scheme, and, in addition, if disqualified assets were transferred, relief can only be granted to the extent the income tax liability exceeds the value of those assets
-
The RS did not file or fail to file the return with fraudulent intent
-
If Rev. Proc. 2003–61 applies, then the income tax liability from which the RS seeks relief must be attributable to an item of the NRS, unless an exception applies. See IRM 25.15.3.8.2.1(4) for the exceptions
-
-
If all the above threshold requirements are met, the guidelines in Rev. Proc. 2003–61 or Rev. Proc. 2000–15 should be followed in determining whether to grant relief. If the decision is made to grant relief, the item of community income is included in the gross income of the NRS and not in the gross income of the RS. However, any additional assessments made against the NRS must be made in accordance with the deficiency procedures of IRC § 6212 and IRC § 6213. Where IRC § 66(c) is asserted against the other spouse, it must be clearly reflected in the notice of deficiency.
-
A RS seeking relief from the operation of community property law under IRC § 66(c) must request such relief in a statement signed under penalties of perjury or Form 8857, Request for Innocent Spouse Relief . The statement must state why relief is appropriate and include the NRS’s name and taxpayer identification number (TIN).
-
To request relief from the Federal income tax liability resulting from the operation of community property law under IRC § 66(c), a RS must file within the time period prescribed in the following paragraphs.
-
The earliest time for submitting a request for an amount underreported on, or omitted from, the RS’s separate return, is the date the RS receives notification of an audit or a letter or notice from the IRS stating there may be an outstanding liability with regard to that year.
-
The latest time for requesting relief, except for requests for equitable relief, is no later than 6 months before the expiration of the period of limitations on assessment, including extensions, against the NRS for the taxable year that is the subject of the request for relief, unless the examination of the RS’s return commences during that 6 month period.
-
If the examination of the RS’s return commences during that 6 month period, the latest time for requesting relief is 30 days after the commencement of the examination.
-
The earliest time for submitting a request for equitable relief relating to deficiency is the date the RS receives notification of an audit or a letter or notice from the IRS stating there may be an outstanding liability with regard to that year.
-
The earliest time for submitting a request for a liability properly reported but unpaid is upon the filing of the individual Federal income tax return.
-
The latest time for requesting relief is two years from the date of the first collection activity against the RS. See IRM 25.15.3.4.4 for additional information on collection activity.
-
The Secretary will not consider a premature request for relief under this section. In the case of a claim for traditional relief, a premature claim is a claim for relief filed for a taxable year prior to a notification of an audit or a letter or notice from the Secretary indicating there may be an outstanding liability with regard to that year. Such notices or letters do not include notices issued pursuant to IRC § 6223 relating to Tax Equity Fiscal Responsibility Act (TEFRA) partnership proceedings. Such notices or letters include notices of computational adjustment to the partner or partner’s spouse (Notice of Income Tax Examination Changes) which compute the partner’s or partner’s spouse’s share of the partnership liability.
-
In the case of a claim for equitable relief involving an underpayment, a premature claim is a claim for relief received prior to the date the RS files an individual Federal income tax return for the taxable year in question.
-
In the case of a claim for equitable relief involving a deficiency, a premature claim is a claim received prior to notification of an audit or letter or notice from the IRS stating there may be an outstanding liability with regard to that year.
-
If a RS in a community property state files a claim for relief from liability because the joint return election was invalid, the examiner should consider whether or not any of the provisions of IRC § 66 apply. If the joint election is determined to be invalid and IRC § 66 does not apply, then the appropriate community property split should be completed for the RS and the returns should be secured.
-
If it is determined IRC § 66 applies, the items of community income attributable to the NRS are included in the gross income of the NRS as long as the statute of limitations on assessment is still open. Thus it is important to track the statute of limitations on assessment against the NRS when processing a claim under IRC § 66.
-
In many instances for non-filers, the Service has filed substitute returns for the taxpayer. In community property states, where there are indications the taxpayer was married, the Service will file substitute returns for both spouses using the married filing separate rates. Relief under IRC § 66(c) may be available to a RS in this instance, as no joint return was filed by the taxpayers.
-
A RS is not entitled to relief under IRC § 66(c) for any taxable year for which the RS has entered into a closing agreement (other than an agreement entered into pursuant to IRC § 6224(c) relating to partnership items) with the Commissioner that disposes of the same liability that is the subject of the claim for relief. In addition, a RS is not entitled to relief under IRC § 66(c) for any taxable year for which the RS has entered into an offer in compromise with the Commissioner. See IRC § 7121 and IRC § 7122 for rules relating to the effect of closing agreements and offers in compromise.
-
The Secretary must send a notice to the NRS to inform them the RS filed a claim for relief and provide the NRS an opportunity to submit any information that should be considered in determining whether the RS should be granted relief from the operation of community property law.
-
This notice will be sent to the NRS’s last known address.
-
The Secretary will share with both spouses the information submitted by the other spouse, unless the Secretary determines the sharing of such information will impair tax administration.
-
Any spouse denied relief may file an appeal with the Appeals Division to administratively review the determination made under IRC § 66(c).
-
In order to seek Tax Court review of a denial of treatment of community income under IRC § 66 , an independent basis for Tax Court jurisdiction must exist, e.g. a case in which the statutory notice of deficiency was issued. The Tax Court cannot review denial of IRC § 66 relief in a stand alone proceeding. See Bernal v. Commissioner, 120 T.C. 102 ( 2003).
-
There are no limitations on refunds within IRC § 66. Other limitations in the Code, such as IRC § 6511, may apply.
-
With respect to equitable relief, the allowability of refunds depends on whether the equitable relief involves an underpayment or a deficiency. See Rev. Proc. 2003–61 for details.
-
The following is a list of letters to be issued to the taxpayers notifying them of the determination on their request for relief under IRC § 66.
-
Letter 3663 - Advises the RS of the preliminary determination and gives them the opportunity to appeal the decision.
-
Letter 3663C - Advises the RS of the preliminary determination and gives them the opportunity to appeal the decision.
-
Letter 3664 - Advises the RS of the final determination.
-
Letter 3664C - Advises the RS of the final determination.
-
Letter 3323 - Advises the NRS of the final determination.
Note:
This is the same letter sent on IRC § 6015 cases.
-
Letter 3662 - Initial contact letter to the RS.
-
Letter 3662C - Initial contact letter to the RS.
-
Letter 3665 - Initial contact letter to the NRS giving notice to the NRS and opportunity to participate in administrative proceedings.
-
Letter 3665C - Initial contact letter to the NRS giving notice to the NRS and opportunity to participate in administrative proceedings.
-
Letter 3666 - Unprocessable Claim letter advising the RS their request for relief has been received; however, it cannot be processed.
-
Letter 3666C - Unprocessable Claim letter advising the RS their request for relief has been received; however, it cannot be processed.