For spouses and ex-spouses facing economic hardship and seeking equitable relief from joint and several tax liability, filing a request for relief under federal law may be an option. The Internal Revenue Code (I.R.C.) provides an exception to the usual rule that spouses are liable for each other’s tax debt and liabilities, but filers must provide convincing evidence that they are facing an economic hardship if they choose that route for relief.
Thomas v. Commissioner of Internal Revenue
In the case of Thomas v. Commissioner of Internal Revenue, Thomas requested relief from underpayments for three years of tax returns based on her assertion that she was facing an economic hardship. Thomas sought liability relief for tax underpayments discovered by the Internal Revenue Service (IRS) for tax years 2012 through 2014, but Commissioner denied the request. When the issue went before the United States Tax Court, the Court denied Thomas’ request for equitable relief based on economic hardship under Internal Revenue Code Section 6015(f) because she had significant assets and did not prove hardship based on her income.
Unpaid Tax Liabilities
Thomas and her late husband filed joint federal income tax returns for 2012 through 2014 and reported unpaid tax liabilities of over $20,000 for each year. The spouses had to use early retirement distributions to cover the costs of the mortgages for their two homes, and they had defaulted on credit card payments. Thomas’ husband died in 2016, and she continued to spend significant amounts on travel and luxury purchases. Then, Thomas filed for innocent spouse relief under I.R.C. § 6015(f), claiming economic hardship and stating she did not know about the unpaid taxes.
Thomas’ inability to prove economic hardship was a major factor in the Court’s decision to deny her request for relief. She did not establish that her income was below 250% of the Federal poverty line, nor did she prove that she met the income requirements. Further, Thomas received a significant benefit from the underpayments.
The Court’s Ruling
The Court was looking for strict proof of Thomas’ financial struggle. Revenue Procedure 2013-34 is used as a guide to the requirements for equitable relief requests, including the eligibility terms and the qualifying factors for economic hardship. The first factor used to determine economic hardship is whether the requesting spouse’s income is below 250% of the Federal poverty line. If their income exceeds this, then their monthly income must not exceed their expenses by more than $300. In the case of Thomas v. Commissioner, Thomas was not able to show that she met the requirements for economic hardship, so her request was denied.
The tax implications of your marital situation can be complex. To clarify where you stand with the IRS, speak with an attorney at Woodruff Family Law Group.