Case — Innocent Spouse Relief

Thanks for sharing!

TL Case Summ

THE QUESTION

At what point does a spouse’s knowledge of embezzlement income make innocent spouse relief unavailable?

THE DISPUTE

Taxpayer Says:  Husband should not have to pay tax on wife’s embezzlement income because he did not know of it at the time the original joint tax return was filed.

Internal Revenue Service Says: Innocent spouse relief does not apply because husband knew of embezzlement when amended return was filed.

THE LAW

From IRC Section Sec. 6013(d)(3): A married couple who file their Federal tax return jointly are both responsible for the return’s accuracy and are both jointly and severally liable for the entire tax due.

From IRC Section 6015(b)(1)(C): An innocent spouse may seek relief from joint and several liability if he can show that he was justifiably ignorant of unreported income or inflated deductions.

THE CAUSE OF THE DISPUTE

The Internal Revenue Code (IRC) does not specify at what point the spouse must be ignorant of the incorrect information on the tax return – in this case, at the time of filing the original return, or when an amended return is filed – for the innocent spouse provision to apply. [Quote from the Tax Court: “Tax law is of course filled with such traps and has never been viewed as a garden of efficiency …”]

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 27KB)

***

HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

***

Other posts you might enjoy

Decisions — Taxing choices Image source: Free Picture © Semen Barkovskiy Dreamstime Stock Photos   How many options can you consider before you find yourself longing for simplicity? Whatever your answer, part of the desire for less complexity comes from not wanting to make the wrong choice. That's especially true ...
Decisions — Where’s your refund? Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons Where's your refund? Possibly helping to reduce the federal budget deficit, if you failed to file a return to get an overpayment back within the applicable time period. That's because the gov...
Case — Fun and games Image source: openclipart.org (public domain image) THE QUESTION Does an organization that offers a recreational activity to achieve a charitable purpose qualify as a charitable organization? THE DISPUTE Taxpayer Says: It operates for charitable purposes because it provides relief for the p...
Case — Carry On THE QUESTION Can an IRA deduction that is disallowed due to active participant status in an employer plan be carried forward and deducted in a future year? THE DISPUTE Taxpayer Says: The 2008 IRA contribution was an “excess contribution” and should be allowable as a deduction in 2010. Intern...
Right answer!
Sorry, wrong answer :(
For the Taxpayer. The IRS acted arbitrarily in choosing to assume the taxpayer’s knowledge of the embezzlement at the time of filing the amended return made him ineligible for relief under the innocent spouse provision.
Posted in Taxing Lessons Case Summaries Tagged with: