Application for Innocent Spouse Relief: If a joint return has been filed and there is an understatement of tax on the return(s) due to erroneous items of one spouse (TAXPAYER)

Application for Innocent Spouse Relief: If a joint return has been filed and there is an understatement of tax on the return(s) due to erroneous items of one spouse (TAXPAYER), with whom a spouse has filed the joint return, it may be possible for the spouse who is attempting to claim innocent spouse status (SPOUSE) to be granted relief from the understated tax. In order to be granted relief, the SPOUSE must be able to show that the SPOUSE had no reason to know that the understated tax existed (or the extent to which the understated tax existed) as well as other criteria which you will be asked to list in your memo to Mrs. Lamprey (see below). It may also be possible to be granted relief with a showing that considering all the facts and circumstances, it would be unfair to hold the SPOUSE liable for the understated tax. In order to be considered for one of the three types of innocent spouse relief a Form 8857, “Request for Innocent Spouse Relief” must be filed.

Assignment: Based on the facts in the case below, prepare a 2-page memo to advise Mrs. C. Lamprey as to the criteria that must be met and whether innocent spouse relief might be granted to her. If so, prepare Form 8857, “Request for Innocent Spouse Relief,” for her signature.

FACTS:

Mrs. C. Lamprey had been married to E.E.L. Lamprey for 20 years. They lived in Florida all the years of their marriage, so you do not have to consider any community property issues. For all this time she had been filing joint tax returns with her husband. In 2019, she discovered that he had a “special friend” who had been seeing for years.

Broken hearted, she divorced E.E.L. in 2019. Mrs. Lamprey filed her 2019 tax return as a single filer. She expected a nice $9,700 refund. However, what she received was a letter from IRS indicating that IRS had applied her refund to the 2017 jointly filed tax year. It seems that E.E.L. had omitted $175,000 of income from the 2017 joint return. C. recalls discussing with E.E.L. his purchase of an expensive new car in 2017. E.E.L. explained it was for business and the business paid for it. She found the explanation reasonable. However, a Porsche convertible seemed a little excessive (although his “special friend” seemed to like it). Mrs. Lamprey also recalls that when it came time to file their return, she just signed the return E.E.L. put in front of her.

He asked her to sign it, “Sign here C.” he said, and she did. He did not coerce her or force her to sign. After all, C. had no financial experience and relied on E.E.L to make all the financial decisions. Numbers made her head spin and she knew that even if he had gone into great detail it is unlikely that she would understand anything anyway.

C. comes to your office for assistance. She needs the money and is incensed at IRS for taking it. She asks if there is anything that she can do to get the money back. You have heard of the innocent spouse statutes under IRC 6015. You tell C. that you will prepare a memo for her and, if appropriate, a form 8857.

Some additional facts appear below:

C. had wages income in 2017 from teaching teach school of $37,500 on which there had been withholding of $5,200. The tax on the $37,500 included in the joint return would approximate $5,200.

C. was not aware of the understatement of income for 2017.

She had asked the only question she could think of and it was related to the new vehicle. Their other living expenses, during 2017, were normal for them. There were no other major expenditures, nor did C. receive any additional funds or gifts from E.E.L.

The understated income was received and E.E.L. grabbed the check and deposited into a joint account with E.E.L. and his “special friend.” C. had no knowledge of that account.

Prior to their divorce, C. moved out of the family home and went to live with her parents as she could not stand to be in the same house with E.E.L. She was legally separated from E.E.L. on January 31, 2020 under a court decree and divorced.

Nothing in the divorce decree indemnifies C. for unpaid or underpaid taxes.

What your memo should cover:

Is innocent spouse relief likely?

What do you base your decision on (e.g. what are the factors)?

What source of relief do you recommend? IRC 6015(b)-(c) or (f)?

Will the Streamlined Procedures under Rev. Proc 2013-34 apply and should it be used?

Documents Provided:

Partially completed form 8857.

Instructions to form 8857. Note the instructions refer the reader to https://www.irs.gov/forms-pubs/about-form-8857 for change and updates.

Taxpayer First Act of 2019 as it relates to Innocent Spouse.

Facts for the Form 8857: The basic facts are prefilled in. Complete the balance of the form including Part VI.

Please note that changes were made to the innocent spouse rules under the Taxpayer First Act of 2019 (6/17/2019). You may wish to take these rules into consideration. See the new rules which are provided as an attachment.

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