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Innocent Spouse Relief Needed…STAT!

March 18, 2011

Have I got a story for you. Luckily the Tax Court did the right thing.

In December 2004, Wendy and her husband filed a joint return for the year 2003. Wendy later asked the IRS to relieve her of the joint income tax liability. The IRS denied her request, so Wendy filed a petition with the Tax Court challenging the IRS denial. The issues on which Wendy and the IRS disagree are:

  • Whether Wendy knew her husband would not pay the tax liability.
  • Whether Wendy will suffer economic hardship if she is not relieved of the joint tax liability.
  • Whether the failure to pay the 2003 income tax benefited Wendy.
  • Whether Wendy made a good faith effort to comply with the 2003 income tax laws.

Wendy’s husband Gary died on April 22, 2006. He was a personal injury defense lawyer and controlled the family finances. Wendy did not perform significant work outside the home, was not allowed to use a credit card, had no personal bank accounts and was not allowed to open any mail. Wendy was allowed to buy groceries with the money given to her by her husband. In 2001, Gary was diagnosed with leukemia. A short time later he transferred the home from joint ownership to Wendy’s name only. Despite the disease he continued to work and earn $460,000 from his law practice in 2003, while Wendy earned only $1,025 in wages. When October 2004 came along, Wendy was nervous that the joint return would not be filed on time, so she filed a separate return. Gary was furious when he found out, arguing that separate returns would cost the family $17,000. He took Wendy’s information and had a joint return prepared. He had Wendy sign it without a chance to examine it. The return was filed on December 24, 2004, with a balance due of $137,453.

When Gary died in 2006, Wendy received a $750,000 proceed from his life insurance policy. She filed a Form 8857, Request For Innocent Spouse Relief, and Form 12510, Questionnaire For Requesting Spouse, in February 2007 asking for relief from the 2003 joint tax liability. In July 2007, the IRS sent Wendy a letter denying her request. The IRS stated she did not qualify for relief under 6015(f). In the summer of 2008, the IRS seized Gary’s 401(k) account of $145,000 to pay the 2003 joint tax liability. This left $106,000 still unpaid, which included interest and penalties. Wendy has three children. Two still live with her in the house, which she is trying to sell. If she could sell the home at the reduced price she will net about $100,000 after the mortgage is paid off. She works at Target for $8 an hour and is having trouble making ends meet. The mortgage payments are $4,600 per month and she only had $300,000 of the $750,000 life insurance left at the time of trial.

Two factors support relief for Wendy: marital status and lack of significant benefit. Since Gary was deceased at the time the IRS made its innocent spouse determination, the marital status factor weighs in favor of granting relief. Wendy did not receive significant benefit for not paying the 2003 income tax liability. She was receiving minimal support from Gary for the children. This factor is positive, weighing in favor of relief. Plus the additional factor that she was browbeaten by her husband to sign the joint return without being allowed to examine the return weighed heavily in her favor. Although she did know (or had reason to know) the 2003 income tax liability would go unpaid, due to Gary’s terminal illness and his large credit card debt from his gambling problem, the Court found relief was warranted

HURRAY!  Just thinking about the life that Wendy had with her deceased husband is enough to frighten one from marriage. And can you imagine the trial, how awful that must have been. She first had to re live how abusive and controlling her husband was and have witnesses to prove that he was that way. But the Court did the right thing. This shows us that when we marry (or even co-mingle finances) it is important to know who we are marrying , and at least run a credit check on him/her… Let GAI ( help you with all your financial matters. If you are thinking about getting married it would be a great idea to see a financial counselor or even Gunwel, so you can see what your future tax filing will look like. We are open Monday through Friday 8am to 8pm and Saturdays from 8am to 5pm. Give us a call at 212-979-6830 or stop by for a visit. We can put your mind to rest. See you soon!

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