Who is an Innocent Spouse?
IRC §6013(e) was added to the Internal Revenue Code in 1971 by Congress who was apparently attempting to resolve the unfairness of joint and several liability in cases where one spouse omitted illegal activity income from a return, and where the other spouse was not aware of either the illegal activity nor the fact that such income had been omitted from the return. The innocent spouse rules require a showing that the substantial understatement resulted from "grossly erroneous items" which were, until the mid-1980's, limited to omitted items of income. The definition of "grossly erroneous items" was expanded in 1984 to include disallowed deductions, credits, or basis, but this relief is limited to only those deductions, credits, or basis which have "no basis in fact or law".
In both omitted income cases and deduction cases, a taxpayer may qualify for relief as an innocent spouse if she meets all of the following requirements. First, that she filed a joint return with her husband. Second, that the return contained a substantial understatement of tax, i.e. $500.00 or more, exclusive of interest and penalties. Third, that the substantial understatement was attributable to "grossly erroneous items" of her husband. Omitted income is per se grossly erroneous, but disallowed deductions, credits, or basis must also be proven to have had "no basis in fact or law". Fourth, that when she signed the return, she did not know, or have reason to know of the understatement contained on the return. Fifth, that it would be inequitable to hold her liable under all of the facts and circumstances. In addition to the above, in cases of grossly erroneous items involving deductions, credits, or basis, the spouse must also demonstrate that in the preadjustment year, i.e. the year prior to the issuance of the notice of deficiency, the substantial understatement in issue exceeded (1) 10% of her adjusted gross income if her AGI was $20,000.00 or less, or (2) 25% of her AGI if her AGI was $20,001.00 or more. Her AGI in the preadjustment year must include the income of her husband, whether or not the husband in the preadjustment year is the husband she had in the year the understatement arose. The taxpayer has the burden of proof on each and every element.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
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