The Tax Court has found in Sutherland, TC Memo 2021-110 that a wife was not entitled to equitable innocent spouse relief because she had knowledge or reason to know that the couple's tax liability would not be paid.
A court may grant innocent spouse relief under Code Sec. 6015(f) under the equitable relief rules of Rev Proc 2013-34, Sec. 4.03, 2013-43 IRB. That section lists seven factors for consideration in determining whether relief should be granted. The listed factors are:
- Marital status,
- Economic hardship,
- Significant benefit,
- Subsequent compliance with Federal tax laws,
- Legal obligation to pay the outstanding tax liability,
- Knowledge or reason to know that the tax liability would not be paid, and
- Mental or physical health.
Ms. Sutherland (Donna) was and still is married to Mr. Sutherland (Scott). Scott owned a business. While Donna was not an employee of the business, she helped with the bookkeeping. The business was audited, and the IRS found that it had not submitted to the IRS the payroll taxes that it was collecting from its employees. In addition, the couple failed to file income tax returns for 2005 and 2006.
The IRS brought a criminal case against Scott for failure to remit the payroll taxes. He pleaded guilty, and as part of his plea agreement he was required to submit delinquent income tax returns for several years, including 2005 and 2006.
The 2005 and 2006 returns showed tax liabilities of $19,000 and $21,000, respectively, which remain unpaid. Donna signed those returns in the courthouse cafeteria less than an hour before Scott's sentencing in 2011. She testified as to her belief that signing the returns might help Scott avoid prison time. She did not review the returns with any care before signing them.
Subsequently, Donna filed a Form 8857, Request for Innocent Spouse Relief, which the IRS denied. Donna conceded that she only qualified for innocent spouse relief under the Rev Proc 2013-34 equitable relief rules.
The Tax Court agreed with the IRS and denied Donna's request for relief. The Court found that six of the seven factors were neutral with regards to Donna. But the Court found that factor 6 (knowledge or reason to know that the tax liability would not be paid) weighed against her.
The Court said that the critical question was whether, at the time the returns were filed, Donna knew that Scott would not, or could not, pay the tax liability at that time or within a reasonable period after filing the returns. The Court said it could consider (among other things) whether Donna knew of any financial difficulties that might prevent timely payment.
When Donna Signed The Income Tax Returns
Just Before Scott Was Being Sentenced,
She Knew That He Would Not Be Able
To Pay The Tax Liability.
Further, since she had done bookkeeping for the business, she should have known that the business was in no financial position to pay the payroll taxes.
For these reasons the Court concluded that Donna knew or should have known, when signing the returns in June 2011, that Scott would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of the returns.
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