Separate Liability Election Relief for Unmarried and Estranged Spouses
You don’t have to be married to get relief from joint and several liability stemming from a joint tax return. Some taxpayers who are no longer married or are widowed, legally separated, or living apart from the person with whom they filed a joint return may also seek relief from tax liability. However, taxpayers must satisfy separate liability election requirements.
To learn more about your ability to qualify for separate liability election call tax attorney Jin Kim at (916) 299-9913 for a free consultation.
IRC 6015(c)
Section 6015(c) of the IRC provides a special election, the separate liability election, that applies to the deficiencies of a taxpayer who, at the time of the election, is:
- No longer married to (or widowed from) the person with whom he or she originally filed the joint return;
- Legally separated from the person with whom he or she originally filed the joint return; or
- Living apart continuously for at least 12 months from the person with whom he or she originally filed the joint return.
Liability Limited to Portion of Deficiency
The individual liability for any deficiency of a taxpayer who elects separate liability will not exceed the portion of the deficiency properly allocable to him or her. However, he or she has the burden of proof to establish the deficiency.
Actual Knowledge
In the traditional innocent spouse relief under IRC Section 6015(b), the knowledge standard is that the spouse seeking relief from tax liability need only have a “reason to know” the understatement. However, the standard for separate liability election relief under IRC Section 6015(c) is heightened to “actual knowledge” or actual or clear awareness of the existence of an item that gives rise to the deficiency.
Actual Knowledge of Erroneous Item Irrelevant
Actual knowledge of an erroneous item is not relevant. Hence, the requesting spouse’s knowledge of an erroneous item and how it was treated on the tax return is unnecessary to the determination of whether he or she had actual knowledge. Actual knowledge may be determined through facts and circumstances, such as the requesting spouse’s deliberate avoidance of learning about an item to be shielded from liability or the joint ownership of an asset.
Anti-Avoidance Provisions of the IRC
There are special rules that are intended to avoid misuse of the separate liability election relief.
Transfers of Property Between Spouses As Fraudulent Scheme
First, the separate liability relief election will be ineffective if the IRS finds and proves transfers of property between the former spouses were made as a fraudulent scheme.
Actual Knowledge of Item That Caused Deficiency
Second, the separate liability election will be ineffective as to the portion of the deficiency not otherwise allocable to the former spouse if he or she had actual knowledge of any item that resulted in the deficiency at the time of signing the joint return. The provision has the effect of allocating the affected item to both spouses.
Disqualified Asset
Lastly, the portion of the deficiency for which the electing spouse is liable is increased by the value of any “disqualified asset” received from the other spouse. An asset is “disqualified” if it is a property or right to property transferred to the spouse requesting relief to avoid liability for tax or payment of tax.
The statutory presumption, which is rebuttable, presumes that any transfer is made for tax avoidance purposes if it was made less than one (1) year before the date of the proposed deficiency (30-day letter) advising the taxpayer of the right to administrative appeal. The rebuttable presumption is not applicable to transfers made under a decree of divorce or separate maintenance. The electing spouse may rebut the tax-avoidance presumption by showing that the principal purpose of the property transfer is not to avoid paying tax.
Mere Administrative Relief
The separate liability election relief is merely an administrative relief and not an abatement. When the relief is granted, and it is later discovered that the electing spouse made false statements, which were relied upon in granting the relief, the IRS will reverse the grant of relief and consider the liability as a new assessment.
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