Congress has authorized “Separation of Liability Relief” for qualifying spouses to relieve them from certain joint and several tax liability related to a tax “deficiency.” 26 U.S.C. § 6015(c). The Tax Code defines “deficiency,” generally, as the amount by which the tax imposed by IRS Subtitle A (income taxes) exceeds the tax amount shown on the taxpayer’s IRS Form 1040 return. 26 U.S.C. § 6211(a). The procedures to separate liability are set forth in 26 U.S.C. § 6015(c) and Rev. Proc. 2013-34. Note that throughout this and the next few chapters, the spouse seeking relief from the IRS is identified as the “Requesting Spouse”; the other spouse will be identified as the “Non-Requesting Spouse” – whether married, separated, or divorced.
Separation of Liability Relief provides for the separate allocation of any tax “deficiency” owed between the Requesting Spouse and the Non-Requesting Spouse when an erroneous item was not reported properly on a joint return. 26 U.S.C. § 6015(c). Pursuant to the Separation of Liability Relief statute, the understated tax liability (plus interest and penalties) on the joint return is allocated between the Requesting Spouse and the Non-Requesting Spouse. Separation of Liability Relief granted to a Requesting Spouse is determined by allocation of items giving rise to the deficiency, if all other criteria are met. Allocation is determined by attributing each item adjusted to one or both spouses. The understated tax allocated to the Requesting Spouse is generally the amount for which the Requesting Spouse is responsible and remains jointly and severally liable. 26 C.F.R. § 1.6015-3(d)(1)(i). The Requesting Spouse is relieved of liability for understated tax not attributed or allocated to the Requesting Spouse. Items which may be attributed to both spouses can be allocated fifty percent (50%) to each spouse. IRM § 25.15.3.8(3) (12-12-2016). Examine the conditions presented below.
A Separation of Liability Relief election to allocate an IRS deficiency limits the Requesting Spouse’s liability to that portion of the deficiency allocated to the Requesting Spouse pursuant to 26 U.S.C. § 6015. 26 C.F.R. § 1.6015-3(d)(1)(i). The Requesting Spouse is then relieved of the former joint and several liability as to the deficiency allocated to the Non-Requesting Spouse. Generally, the Requesting Spouse may not be relieved of any part of a deficiency which relates to an item attributable to the Requesting Spouse. IRM § 25.15.3.8.2.4(1) (12-12-2016).
For Separation of Liability Relief purposes, the general rule is that liability for erroneous items identified on the IRS’ notice of deficiency is allocated to the spouses as if separate returns had been filed originally. 26 U.S.C. § 6015(d)(3)(A); 26 C.F.R. § 1.6015-3(d)(2). Congress provided four exceptions to the allocation rule identified below. 26 U.S.C. § 6015(d)(3)(A); 26 C.F.R. § 1.6015-3(d)(2).
The Requesting Spouse has the burden to prove that the he/she meets the qualifications identified above for an election for Separation of Liability Relief. The Requesting Spouse must establish the basis for allocating the erroneous items. 26 U.S.C. § 6015(c)(2); 26 C.F.R. § 1.6015-3(d)(3). The Requesting Spouse bears the burden of proof in establishing his/her allocated portion of the liability. IRM § 25.15.3.8.2.3 (12-12-2016). The Requesting Spouse must prove that the items giving rise to an understatement are attributable to the Non-Requesting Spouse. IRM § 25.15.3.8.2.3 (12-12-2016). IRS examiners should base their determination on the credibility of the Requesting Spouse if IRS efforts to retrieve the administrative file are unsuccessful, and no other corroborating evidence is available to determine attribution of the erroneous items. IRM § 25.15.3.8.2.3 (12-12-2016).
However, the Requesting Spouse does not have the burden to prove the absence of “actual knowledge” of erroneous items causing the tax deficiency. Similarly, the Requesting Spouse does not have the burden to prove the absence of fraudulent asset transfers. 26 U.S.C. § 6015(c)(2); 26 U.S.C. § 6015(d)(3); 26 C.F.R. § 1.6015-3(d)(3); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002). These burdens fall on the IRS. See 26 U.S.C. § 6015(c)(2); 26 U.S.C. § 6015 (c)(3)(C); 26 C.F.R. § 1.6015-3(c)(2)(i) & (c)(3)(iii); IRM § 25.15.3.8.2.1(1) (12-12-2016); IRM § 25.15.3.8.2.1(2) (12-12-2016); IRM § 25.15.3.8.2.3 (12-12-2016); Cheshire v. Comm. of Internal Revenue, 282 F.3d 326, 332 (5th Cir. 2002).
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