Saving Taxes: The Cooperative But Innocent Spouse

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Innocent spouse tax planning, Houston Tax Attorney
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Innocent spouse relief can provide an excellent remedy to allocate taxes between spouses. While the innocent spouse rules are not all that complex, the application of the rules can be.

Part of the complexity comes from the varying motives of the parties. Spouses and former spouses can have a number of different motives for requesting innocent spouse relief.

There are times when the spouses may cooperate with each other and strategically request innocent spouse relief to avoid paying taxes. Consider a high income earner who is or was married to someone with no income. The spouses may request innocent spouse relief to split the liability between them with the expectation that one of the spouses may qualify to settle their balance with the IRS. The innocent spouse rules do not account for this type of cooperation between spouses or ex-spouses. The IRS usually does not even consider this type of motivation.

This brings us to the Jones v. Commissioner, No. 20-70013 (9th Cir. 2022) type of case. The Jones case involves an ex-spouse who filed a joint income tax return late after the marriage had already ended. The unfiled or late tax return adds an element of hindsight and extra time that savvy spouses may be able to benefit from in planning for innocent spouse claims.

Facts & Procedural History

This dispute involved a late-filed tax return for the 2010 tax year. After the couple divorced, the ex-husband filed a joint tax return for the couple. The IRS recorded the balance as a joint tax liability for both spouses.

The wife filed for innocent spouse relief. The IRS and the U.S. Tax Court both rejected the innocent spouse claim. The wife appealed.

The question for the court was whether the ex-wife was entitled to innocent spouse relief even though she did not sign the tax return that gave rise to the joint income tax liability.

About Innocent Spouse Relief

Innocent spouse relief refers to a provision in the tax law that can allow one spouse to avoid liability for jointly-filed taxes. It can also be used to avoid paying a joint tax liability.

There are several types of innocent spouse relief. Traditional innocent spouse relief is for erroneous items reported on a joint tax return. Separation of liability relief applies for divorced or spouses who live separately. Equitable relief is for a valid tax liability that one spouse should not have to pay. There are different requirements that have to be met for each types of relief.

In this case, the spouse applied for equitable relief. With this type of relief, there are threshold factors that are to be considered. If these threshold factors are met, the IRS will usually grant innocent spouse relief. If they are not met, then additional factors have to be considered.

One of the threshold factors asks whether there is a jointly-filed income tax return. If the threshold factors aren’t met, the other factors include one that looks to the innocent spouse’s knowledge of the tax understatement.

With both of these factors, there is a question as to what happens if the non-requesting spouse filed the income tax returns in question and the innocent spouse applicant did not sign the tax returns? Put another way, can the non-requesting spouse prevent the applicant from qualifying for innocent spouse by pointing out that the innocent spouse did not sign the tax return?

This is where the “tacit consent” rule comes into play.

We have previously considered the “tacit consent” rule for tax returns. This rule allows one spouse to sign a tax return for another spouse.

The appeals court in the Jones case summarized the issue as follows:

The tax court correctly articulated the governing legal standard, and it found that Jones tacitly consented to filing the 2010 joint tax return because she had provided her then-husband with her W-2s and other tax information; she failed to file a separate income tax return; and she later allowed her spouse in a subsequent marriage to sign her name to their joint tax returns. Although the last of those facts does not seem to us to be especially probative, and although Jones had remarried by the time her ex-husband signed her name on the 2010 return, those considerations are insufficient to establish that the tax court clearly erred. The 2010 joint tax return is therefore valid.

The court held that the consent has to be at the “time of filing.” It apparently does not have to be “at the time of filing during the marriage.”

Given this case, it appears that the tacit consent rule can even apply to a former spouse. A former spouse can sign a late-filed joint income tax return and that return can be a valid tax return.

In a situation where the spouses are not acting in concert to lower their taxes, this holding can be helpful for an innocent spouse in that the non-requesting spouse probably cannot argue that there was no valid tax return and, thus, innocent spouse relief is not available. It is not helpful in that the innocent spouse cannot avoid liability altogether by noting that there is no valid tax return. If the threshold requirements are not met, this factor can also weigh in favor of the innocent spouse. Specifically, it could help show that the innocent spouse was not aware of or had knowledge of the tax understatement.

In the situation where the spouses are acting in concert, the case highlights that late filed returns can provide additional time for spouses to plan to reduce their combined tax liabilities. This was not the issue in this particular case, but the fact pattern it shows that it is possible for others. Those with unfiled tax returns can go back and file jointly with the plan for one spouse to file innocent spouse relief and, according to Jones, this can even be done after the marriage has ended.

The Takeaway

While it probably wasn’t intended to be the result, spouses can work together to help one spouse qualify for innocent spouse relief with the intent of reducing the couple’s income tax liability. The Jones case highlights the ability to file a late joint income tax return in this situation. This may allow more taxpayers time to plan for innocent spouse relief even after the marriage ends. This can create tax savings opportunities for some taxpayers.

Of course, the same may be true for spouses who are not working together and just want to avoid the tax liability themselves. A late filed tax return might be used to accomplish this.

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