ALI-ABA Course of Study Tax Controversy Practice: From Administrative Audit Through Litigation

Transcription

1 171 ALI-ABA Course of Study Tax Controversy Practice: From Administrative Audit Through Litigation Sponsored with the cooperation of the ABA Section of Taxation June 12-13, 2008 Chicago, Illinois Relief from Joint and Several Liability By Karen L. Hawkins Taggart & Hawkins, P.C. Oakland, California Copyright Karen L. Hawkins. All Rights Reserved.

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3 173 RELIEF FROM JOINT AND SEVERAL LIABILITY Karen L. Hawkins Taggart & Hawkins 1901 Harrison St., Ste Oakland, CA (tel) (fax) I. The Statutory Framework A. The Election under IRC 6015(b). 1. Elements a. Joint tax return; b. Understatement of tax on the return attributable to erroneous items of the non-requesting spouse; c. The requesting spouse establishes that in signing the return, s/he did not know, and had no reason to know, that there was such an understatement; d. Taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency attributable to the other spouse. e. The requesting spouse elects the benefits of 6015(b) at any time after a deficiency for the year is asserted but not later than 2 years after the date on which collection activities begin with respect to the requesting spouse. Collection activity = Notice of Intent to Levy with CDP Hearing Rights; offsets of refunds due on subsequent tax returns. Final Treas. Regs Sec through -9. But see McGee case, infra. 2. Proportional innocence. If the requesting spouse is unable to establish that s/he did not know, and had no reason to know, that there was an understatement on the jointly filed return, that individual may still establish that s/he did not know, and had no reason to know, the 1

4 174 magnitude of the understatement, in which case, the requesting spouse will be relieved of liability on a proportional basis. 3. An Understatement for purposes of 6015 has the same meaning as that same term in 6662(d)(2)(A). 4. A refund is possible with a successful election under 6015(b). B. Separate Liability Election under IRC 6015(c). 1. Elements. a. Requesting spouse must, at the time the election is filed, no longer be married to, or be legally separated from, the other joint filer; b. Or, requesting spouse was not a member of the same household with the other joint filer at any time during the 12 month period 1 preceding the election ; c. Election may be made at any time after a deficiency for the year is asserted, but not later than 2 years after the date on which collection activities begin with respect to the requesting spouse; d. Election must specify items on the tax return which are attributable to the other spouse and from which the requesting spouse seeks relief; e. Fraudulent scheme. Assets transferred between spouses as part of a fraudulent scheme renders both spouses ineligible to elect under 6015(c); f. Requesting spouse cannot have actual knowledge at the time the return is signed of any item giving rise to the deficiency (or portion thereof) which is not allocable to him/her. 2. Disqualified assets. Assets transferred within one year of the first letter proposing a deficiency which gives rise to the opportunity for review by Appeals (except transfers pursuant to divorce, separation or other non-avoidance purposes) are presumed to be disqualified assets, the value of which increases the proportionate liability of the requesting 1. For these purposes, death of the nonrequesting spouse qualifies irrespective of the length of time between the death and the election. 2

5 175 spouse. The presumption is rebuttable. 3. Burden of proof is split between requesting spouse and IRS: a. Requesting spouse has the burden with respect to establishing the portion of any deficiency allocable to that individual; b. Tax authority has the burden to demonstrate that assets were transferred between the joint filers as part of a fraudulent scheme thereby making either joint filer ineligible for the election; c. Tax Authority has the burden to demonstrate that the requesting spouse had actual knowledge, at the time the return was signed, of any item giving rise to a deficiency (or a portion thereof) otherwise not allocable to that requesting spouse. A signature placed on the return under duress negates actual knowledge. NOTE: IRS position is that a return signed under duress is not a joint return, thereby rendering relief under 6015 unavailable. 4. Allocation rules. a. Allocation of items for determination of a deficiency with respect to the requesting spouse occur in the same manner as if separate returns were filed. b. Tax benefit rule applies to recomputations, i.e., cannot disavow liability to the extent a benefit was received on the original return. c. All recomputations are done without regard to community property laws. d. Disallowance of credits, or other taxes imposed by Sections 1, 55, are allocated 100% to the individual whose item generated the deduction/tax, e.g., self-employment is allocate totally to the earner of the self-employment income. 5. Tax & Trade Relief Extension Act of 1998 (P.L , 10/21/98) made a technical correction to 6015 which precludes refunds for relief granted under IRC 6015(c). 3