There are three types of relief for an “innocent spouse,” commonly referred to as: innocent spouse relief; separation of liability; and, equitable relief. The requirements of each of these forms of relief are discussed elsewhere in this blog. In this article, I focus on the significant difference in the level of knowledge required to gain relief.
To gain innocent spouse relief (IRC Section 6015(b)) or equitable relief (IRC Section 6015(f)) you should be able to demonstrate that not only did you have no actual knowledge of any item giving rise to a deficiency (or portion thereof) which is not applicable to you, or the tax obligation, but also, that you had no reason to know of these items. While you can still gain equitable relief (IRC Section 6015(f)) if you had reason to know or actual knowledge, they are factors considered by the IRS and the courts.
In a request for separation of liability (IRC Section 6015 (c)), neither the IRS nor the court considers that you had a reason to know. You must have actual knowledge to have your request for relief denied.
To gain relief under the separation of liability provisions, IRC 6015(c), you must be able to demonstrate:
1. At the time you request relief, you are no longer married to, or you are legally separated from, the individual with whom you filed the joint return to which your request for relief relates; or
2. You were not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date you requested relief.
To prevent you from gaining separation of liability relief, the IRS, or the intervening spouse objecting to the relief, must demonstrate that, at the time you signed the return, you had actual knowledge of any item giving rise to the deficiency (or portion thereof) which is not applicable to you. Proving you had a reason to know, is not enough. This can be a very valuable distinction to a spouse requesting relief in a divorce situation.
The United States Tax Court made this requirement of actual knowledge very clear in its recent decision in Bishop v. Commissioner, T. C. Summary Opinion 2018-1. The party requesting relief seemed to have a very good reason to have known about the item giving rise to the deficiency, but claimed to have no actual knowledge of the item. The intervening spouse, objecting to relief, could not prove the requesting spouse had actual knowledge, so the Court upheld the relief granted by the IRS.
This is very important to keep in mind as the IRS personnel you contact may tell you that to deny you relief, all the IRS needs to demonstrate is that you had a reason to know of the item giving rise to the deficiency. While this is true for innocent spouse relief under IRC Section 6013(b) and can be a factor in equitable relief under IRC Section 6013(f), it is not true for separation of liability under IRC Section 6013(c).