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Lesson from the Tax Court: Limits to innocent-spouse relief

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in Small Business Tax,Small Business Tax Deduction Strategies

The tax law may protect an “innocent spouse” from joint and several tax liability if numerous requirements are met. For instance, the understatement of tax must be due to errors or omissions by your spouse, and you must establish that you did not know—or had no reason to know—that there was an understatement of tax.  

However, as a new Tax Court case shows, there are limits to the relief afforded to so-called innocent spouses. (Bruen, TC Memo 2009-249)

Facts: Under their divorce decree, a taxpayer and her ex-husband agreed to file joint returns for 2002 and 2003. Each was liable for half of their 2003 federal income tax. The agreement did not cover their 2002 liability. (It was assumed there was no underpayment for that year.)

But, the couple’s amended returns for 2002 and 2003 showed that they owed tax for both years. The underpayments were solely attributable to the ex-husband’s income.

Result: The Tax Court concluded that the taxpayer was entitled to equitable relief for her ex-husband’s 50% share of the 2002 and 2003 tax liability. She was able to demonstrate that she didn’t know, or had no reason to know, that her ex-husband would not pay his share. But the taxpayer remained liable for her half of the liability. There was no evidence of extenuating factors such as abuse or economic hardship.

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