Innocent spouse tax relief can provide a remedy for spouses who are liable for taxes reported on a jointly filed income tax return. It is an equitable remedy. But is it available if the tax is due to an obvious error on the tax returns that the spouses both signed? The court addressed this in Denton v. Commissioner, T.C. Summary Opinion 2009-87.
Facts & Procedural History
Mr. and Mrs. Denton were married in 1995, they separated in 2005, and were divorced in 2006. Their divorce decree did not address liability for current or past income taxes.
Mr. and Mrs. Denton lived with Mr. Denton’s mother in 2003 and Mr. Dentons mother paid most of their living expenses.
Mr. Denton was self-employed as a commercial truck driver. He leased the truck from his client and the compensation that he received from the client was net of lease, insurance, and license fees. The client issued a Form 1099-MISC, Miscellaneous Income, to Mr. Denton for 2003 showing compensation totaling $41,798.
Mrs. Denton worked as a waitress and then a sales representative and earned $985 in 2003.
The Dentons filed a joint income tax return for tax year 2003. The return did not report the $41,798 compensation Mr. Denton received as a truck driver or the $985 compensation Mrs. Denton received.
The IRS audited the 2003 tax return and issued a notice of deficiency to both Mr. and Mrs. Denton. Neither Mr. or Mrs. Denton contested the deficiency notice.
Mrs. Denton filed a request for innocent spouse relief, which the IRS denied. Mrs. Denton petitioned the U.S. Tax Court to ask it to review her innocent spouse relief. Mr. Denton intervened in the court proceeding, arguing that Mrs. Denton should not be granted innocent spouse relief.
Types of Innocent Spouse Relief
There are three types of innocent spouse relief. One type provides full or apportioned relief from joint and several liability (Section 6015(b)). The second type provides proportionate tax relief to divorced or separated taxpayers (Section 6015(c)). The third type provides equitable relief from joint and several liability in certain circumstances if relief is not available under the other two types (Section 6015(f)).
Knowledge of Omitted Income
The court considered the first two types of innocent spouse relief. It focused on the fact that Mrs. Denton was aware that the 2003 income tax return omitted the $41,798 compensation Mr. Denton received as a truck driver or the $985 compensation Mrs. Denton received. The court noted that Mrs. Denton believed that the errors on that return would be corrected by an amended return filed by Mr. Denton.
While not discussed in the case, this seems plausible given the realities of working as a truck driver. Truck drivers, particularly over the road truckers, often struggle to compile the information needed to compute their income tax liabilities given the time they are away from home, the various types of expenses and receipts they have to keep, and the special tax provisions that apply to truck drivers.
Given this knowledge, the court concluded that Mrs. Denton did not qualify for the first two types of innocent spouse relief. But the court did not stop there. It went on to consider the third type of relief.
Equitable Relief Available Despite Knowledge
The third type of innocent spouse relief, equitable relief, is available if taking into account all the facts and circumstances, it would be inequitable to hold the taxpayer liable for any unpaid tax or deficiency.
The court also noted that had Mrs. Denton not filed a joint return with Mr. Denton, her income for that year would not have obligated her to file a federal income tax return.
Based on this and a few other factors, the court concluded that Mrs. Denton was entitled to innocent spouse relief. Thus, the court granted Mrs. Denton relief for the income taxes due on Mr. Denton’s truck driving compensation even though she had actual knowledge that the return she signed failed to report this income.