If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If you request any of these types of relief, and the IRS determines you do not qualify for any of them, the IRS will consider whether equitable relief is appropriate.
Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax or an underpayment of tax.
Underpayment of Tax. An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2009 return shows that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.
Understatement of Tax. An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.
Conditions for Getting IRS Innocent Spouse Equitable Relief
You may qualify for equitable relief if you meet all of the following conditions.
- You are not eligible for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law.
- You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
- Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Refer to Relief by Separation of Liability for more information about Transfers of Property to Avoid Tax.
- You did not file or fail to file your return with the intent to commit fraud.
- You did not pay the tax. However, see Refunds, below, for situations in which you are entitled to a refund of payments you made.
- You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. See Factors for Determining Whether to Grant Equitable Relief, below.
- The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies:
- The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.
- If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.
- You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).
- You establish that you were the victim of abuse before signing the return and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.
- You established that your spouse’s (or former spouse’s) fraud is the reason for the erroneous item causing the understatement of tax.
IRS Equitable Relief Rules: Knowledge or Reason to Know
In the case of an underpayment of tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability.
In the case of an income tax liability that arose from an understatement of tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understatement. Reason to know of the item giving rise to the understatement will not be weighed more heavily than other factors. Actual knowledge of the item giving rise to the understatement, however, is a strong factor weighing against relief. This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling.
In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.
If you have experienced an IRS audit, or have filed a tax return with a balance due and have received IRS collections notices, contact a tax lawyer today to discuss your options in resolving your tax dispute.