Innocent spouse relief can provide a remedy for spouses who file joint tax returns. This relief is particularly useful if the innocent spouse can obtain a tax refund for amounts previously paid. But not all innocent spouse requests can result in refunds. One has to be careful what they ask for. The Henry v. Commissioner, T.C. Memo. 2019-24, case provides an example of this.
Facts & Procedural History
The taxpayers filed a joint return for 2012. After divorce, the IRS sent the taxpayers a notice to increase the tax due for income the taxpayer-husband earned and failed to report on the tax return.
The taxpayer-wife filed a request for innocent spouse relief. The IRS disallowed the request and the taxpayer-wife filed a protest to appeal the decision. The IRS Appeals Office granted innocent spouse relief, but refused to issue a refund for the amounts the taxpayer-wife had paid. The dispute centered on whether the taxpayer-wife is entitled to a refund of money she paid.
Types of Innocent Spouse Relief
- Traditional innocent spouse relief.
- Separation of liability relief.
- Equitable relief.
Each type of relief has its own requirements and limitations.
The first type, traditional innocent spouse relief, relieves the innocent spouse for the tax stemming from improperly reported items or omitted items on a joint tax return. Taxpayers do not have to be separated or divorced to qualify for this type of relief.
The second type, separation of liability relief, apportions the tax reported on a joint return between the spouses. If granted, the innocent spouse is only liable for their allocated portion. To qualify, the taxpayer generally has to be separated or divorced from their spouse.
The third type, equitable relief, is a catch-all that can be used if the other two types cannot be used. It also differs from the other two types of relief in that it can allow a taxpayer to avoid liability for an unpaid tax that was correct, but remains uncollected.
Refunds and Innocent Spouse Relief
One has to consider the type of relief to request if they are attempting to obtain a refund of taxes paid for joint tax returns. This is different than merely asking for relief from liability–it is asking for tax payments to be returned to the innocent spouse.
As pointed out in the Henry case, the Code does not allow refunds for separation of liability relief–the second type of relief described above. This is the type of relief the IRS Office of Appeals had originally granted the taxpayer-wife. In doing so, Appeals prevented the taxpayer-wife from obtaining a refund of taxes she paid and resulted in the IRS applying the overpayment to the tax debt for a prior year in which a joint return was also filed.
This afforded the taxpayer-wife will little benefit from pursuing innocent spouse relief. She wanted a refund. She didn’t want the tax to offset a prior liability. So she contested the appeals officer’s determination by filing a petition with the U.S. Tax Court.
Equitable Relief to Obtain a Tax Refund
The court construed the taxpayer-wife’s argument to be that she is entitled to equitable relief, not just separation of liability relief as granted by the appeals officer.
The court considered the factors for this type of relief and concluded that the taxpayer qualified for equitable relief.
It was able to do this as the IRS attorney conceded that the taxpayer-wife qualified for equitable relief. This concession allowed the court to conclude that the taxpayer did not qualify for separation of liability relief. Remember, to qualify for equitable relief, the innocent spouse cannot also qualify for separation from liability relief. The court used this concession from the IRS attorney to effectively overturn the express findings of the IRS appeals officer.
By granting the taxpayer-wife equitable relief tax relief, the court allowed the taxpayer to recoup her tax refund.