Question

Curtis and Kathy filed a joint return for Year One on April 15, Year Two. The return claimed bogus deductions related to Curtis’s cattle-raising business. After their divorce in Year Three, the Internal Revenue Service discovered the bogus deductions and issued a notice of deficiency to both Curtis and Kathy.

While they were married, Kathy often visited Curtis’s farmland and on occasion helped out with some chores related to the business. Kathy collected all of Curtis’s receipts and sent them to their accountant to prepare their tax returns. Kathy saw that the receipts for Year One were unusually large, but she did not question Curtis with respect to any of the receipts. Kathy had no other involvement in Curtis’s business.

If Kathy files a request for innocent spouse relief under § 6015, how should the Service respond?

Answer 1

Under IRC 6013 (d) (3), spouses who file joint income tax returns, for the liability for income tax reported on those returns they are jointly and severally responsible. However, of one spouse is innocent of actions taken by other spouse which results in understatement of tax liability, innocent spouse relief request can be made persuent to IRC 2015

On the grounds of Lack of knowledge under IRC 2015

It can be elected by the spouse who is requesting for relief within 2 years of collection activities by IRS establishing that

• He or she did not know and had no reason to know the understatement at the time of signing the return.
• Facts and circumstances indicate that it would be inequitable to hold him or her liable for the understatement

However, the requesting spouse will be considered to have knowledge if

• He or she had actual knowledge of the understatement
• A reasonable person in that circumstances would've known

The facts and circumstances will be considered go decide whether the requesting spouse had no reason to know about the understatement.

In the given case, Kathy had involvement in the business. She used to visit the business on specific occasion and help in the chores. Kathy also came across the unusually large receipt but she didn't ask Curtis about it.

The negligence of Kathy and the fact that she had some involvement in the business can not be ignored. The service should reject Kathy's request.