The Tax Court in Grady, TC Summary Opinion 2021-29, held that both for a tax year with respect to which a wife didn't know her joint return taxes weren't being paid by her husband, and for several years with respect to which she did know her joint return taxes weren't being paid, the wife was entitled to equitable innocent spouse relief.
IRC § 6015 provides that a spouse who has made a joint return may elect to seek relief from joint and several liability. IRC § 6015(f) provides for equitable innocent spouse relief under procedures prescribed by IRS if, taking into account "all the facts and circumstances," it is inequitable to hold the individual liable for any unpaid tax or any deficiency.
The IRS's guidelines for determining whether to grant IRC § 6015(f) relief are found in Rev Proc 2013-34, 2013-43 IRB 397. If certain threshold conditions are met, then the IRS will relieve the requesting spouse of liability if either (1) three additional conditions for so-called “streamlined” relief are met, or (2) relief is justified upon consideration of multiple equitable factors.
The requesting spouse is eligible for streamlined relief under Rev Proc 2013-34, sec. 4.02, only in cases in which that spouse establishes that: (1) on the date the IRS makes its determination, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse; (2) the requesting spouse will suffer economic hardship if relief is not granted; and (3) on the date the joint return was filed, the requesting spouse did not know or have reason to know the nonrequesting spouse would not or could not pay the underpayment.
The multiple factor test looks at, but is not limited to: (a) marital status, (b) economic hardship, (c) knowledge or reason to know of understatement or underpayment, (d) legal obligations to pay the tax, (e) significant benefits reaped from the understatement, (f) subsequent compliance with income tax laws, and (g) mental or physical health. A single factor is not determinative. (Rev Proc 2013-34, sec. 4.03(2))
The taxpayer, Ms. Gans, was married to Mr. Dickey for the years at issue, 2006-2011.
Mr. Dickey took charge of filing and paying taxes due with the couple's joint tax returns. However, for each of the years at issue, he either filed late or didn't file at all. Mr. Dickey repeatedly told Ms. Gans that he would file their tax returns and pay their tax debts, and she should not worry about it. He set up multiple installment agreements for the couple's Federal income tax liabilities. He made intermittent payments between September 2008 and June 2015, but none after that. Although Ms. Gans had access to the couple's joint bank accounts, she did not check them to see whether Mr. Dickey made the required installment agreement payments.
The couple divorced in 2015. Thereafter, Ms. Gans moved in with her parents. Later, she married Mr. Gans.
In concluding that Ms. Gans qualified for streamlined relief in 2006, the Court noted:
Ms. Gans was no longer married to Mr. Dickey when the IRS issued its final determination.
Ms. Gans would suffer economic hardship if relief was not granted. A requesting spouse will suffer economic hardship if payment of part or all of the tax liability "will cause the requesting spouse to be unable to pay reasonable basic living expenses." The determination as to what constitutes a reasonable amount for basic living expenses may vary with the circumstances of the individual taxpayer but will not include the maintenance of an affluent or luxurious lifestyle. (Rev Proc 2013-34, sec. 4.03(2)(b))
Ms. Gans testified that she was employed and had earned $14,190.52 in 2018 at the time of the trial. The Court has taken judicial notice that the poverty level for one person in 2018 was $12,140. She did not own a car or a house. Rather, she lived with her elderly and sick parents and then her new husband, Mr. Gans, who owned the house she lived in and the cars she used.
Ms. Gans did not have reason to know that Mr. Dickey would not pay the 2006 joint Federal income tax liability. When the couple filed their 2006 joint Federal tax return, Mr. Dickey requested an installment agreement within 30 days after the return was filed that would apply to the 2006 tax liability. Therefore, when Ms. Gans signed the 2006 joint Federal income tax return, she did not know or have reason to know that the underpayment would not be paid.
As to the other tax years in question, the Court held that each of the factors weighed in favor of relief other than the knew-or-had-reason-to-know factor.
For example, the Court looked to the same factors noted above in determining that the wife met the economic hardship test. And the Court noted that the "significant benefits" test weighed in her favor—she did not receive a significant benefit from the failure to pay the outstanding tax liabilities.
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