If you don’t qualify for other types of relief such as innocent spouse relief under Treasury Regulations (“Treas. Reg.”) § 1.6015-2 or relief by separation of liability under Treas. Reg. § 1.6015-3, equitable relief, though sometimes difficult to have accepted, may be another alternative. Prior to considering equitable relief as an option the IRS must have determined you do not qualify for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income. Below are some key pieces of information to consider before pursuing equitable relief.
WHAT IS EQUITABLE RELIEF?
Equitable relief under Internal Revenue Code (“IRC”) § 6015 (f) is when it is deemed inequitable to hold the requesting spouse liable for unpaid taxes or a tax deficiency. These cases are generally based on the argument that it would be unfair to hold the requesting spouse liable for a tax debt due to extenuating circumstances beyond the requesting spouse’s control.
This relief encompasses IRS tax debts arising from the understatement of tax (under-reporting of income, overstatement of deductions, or erroneously claiming credits) but, it may also be used in the case of the underpayment of tax. An example for the underpayment of tax would be in the case that a tax return was filed with a balance due but was not paid.
FACTORS THAT DETERMINE WHETHER EQUITABLE RELIEF WILL BE GRANTED
The extenuating circumstances, as referenced above, are really broken down into different factors under Revenue Procedure (“Rev. Proc.”) 2000-15 and will be thoroughly reviewed when considering whether or not to grant the requesting spouse equitable relief. Each factor carries its own weight and will be determined as a positive factor for or a negative factor against the requesting spouse. Below are a list of the factors you should be aware of to help you consider whether equitable relief is something for you to pursue:
1) Are you separated or divorced from your spouse?
2) If equitable relief is not granted, will it cause you an economic hardship?
3) Did you know, or have reason to know, of the items causing the understatement of tax or at the time the return was signed know, or have reason to know, that the tax owed would go unpaid?
4) Were you abused by your ex-spouse but, the abuse did not amount to duress?
5) Does your ex-spouse have a legal obligation under a divorce decree or separation agreement to pay the tax? (This can be considered a negative factor if you were aware that the tax would go unpaid in the case of an underpayment of tax).
6) Do you have a legal obligation under a divorce decree or separation agreement to pay the tax?
7) Did you receive a significant benefit from the unpaid tax or items causing the understatement of tax?
8) Have you made an effort to comply with the Federal income tax laws for the tax year in question and for each following year? (This would be considered having filed your returns on time and not incurring any new tax liability that wasn’t paid when the return was filed)
9) Is the tax attributable to you or your ex-spouse’s understatement of tax or underpayment of tax?
Answering these questions and weighing the good with the bad is a way to see how strong of a case you may actually have. Of course, some factors may hold more weight than others and how each factor is considered depends on the strength of the argument put forth by you or your representation.
QUALIFICATIONS FOR EQUITABLE RELIEF
Once you have answered the above questions you should have a good idea as to whether equitable relief is something that will benefit you. Under Rev. Proc. 2000-15 there are additional qualifications for requesting equitable relief that will need to be met. Make sure you can answer yes to each of these questions otherwise you will not qualify for equitable relief.
1) Has the IRS deemed you are ineligible for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income?
2) There was never a transfer of assets between you and your spouse that could be deemed part of a fraudulent scheme?
3) Your ex-spouse never transferred property to you for the purpose of avoiding tax or the payment of tax?
4) When filing the return you weren’t intending to commit fraud?
5) Have you established that, after taking into account all factors as mentioned above, it would be unfair to hold you liable for the tax?
RELATED TYPES OF RELIEF
When exploring different relief options make sure you are choosing the one that truly fits your circumstance. Below are some related relief options: