1.9 Equitable Relief
The IRS may grant equitable relief for liability on a joint return where innocent spouse relief (1.7) and separate liability (1.8) are not available. For example, the separate liability election and innocent spouse relief are not available where the proper amount of tax was reported on a joint return but your spouse failed to pay the tax owed. If you signed a correct return on which tax was owed and, without your knowledge, your spouse used the funds intended for payment of the tax for other purposes, the IRS may grant you equitable relief. A request for equitable relief is made on Form 8857. The IRS may also grant equitable relief in cases where the proper amount of tax was understated on the joint return if it would be inequitable to hold you liable.
Threshold conditions you must meet for relief.
Each of the following conditions must be met before the IRS will even consider granting you equitable relief:
Deadline for requesting equitable relief.
Before July 25, 2011, the IRS required a request for equitable relief to be made within two years of the first IRS collection activity, but in response to strong opposition, the two-year deadline was eliminated (Notice 2011-70). Under Notice 2011-70, a request for relief for unpaid taxes must be made before the statute of limitations on IRS collections expires, which generally is 10 years after the tax has been assessed. A taxpayer whose equitable relief request was denied solely due to the prior two-year limit can reapply on Form 8857 if the 10-year collection statute of limitations for the tax years involved has not expired.
Relief granted in streamlined determination.
If you meet the threshold requirements (shown above) for obtaining equitable relief, the IRS will grant relief in a streamlined determination if you are no longer married, you would face economic hardship if relief were not granted, and you did not know or have reason to know that tax was understated on the joint return or that the tax shown would not be paid. Streamlined relief will not be denied even if you had such knowledge or reason to know, if you were subjected to abuse by the other spouse or you were unable to challenge how items were treated on the joint return or why the tax due was not paid because the other spouse controlled the household finances. If the conditions for streamlined relief are met, the other factors normally taken into account (discussed below) will not be considered.
Factors the IRS will consider.
If the threshold conditions are satisfied and you do not qualify for streamlined relief as just discussed, you must convince the IRS that equitable relief is appropriate. The IRS will consider all the facts and circumstances.
The following is a nonexclusive list of factors that the IRS will take into account in determining whether to grant equitable relief (Notice 2012-8): whether you are separated or divorced from the spouse with whom you filed the joint return, whether you would suffer economic hardship (i.e., be unable to meet basic living expenses), whether you received any significant benefit from the unpaid tax or item giving rise to the deficiency (beyond normal support), whether you knew or had reason to know that tax was understated on the joint return or that the tax would not be paid, whether you were obligated to pay the outstanding tax liability by a divorce decreee or other legally binding agreement, whether you have made a good faith effort to comply with the tax laws in later years, and whether you were in poor health (physical or mental) when you signed the joint return or you requested relief.
In Notice 2012-8, the IRS announced a significant expansion in how it will take into account abuse and the degree of financial control by the other spouse (with whom the joint return was filed). If you are requesting equitable relief and were the victim of physical or psychological abuse, or were unable to challenge how items were treated on the joint return or why taxes were not paid because the other spouse controlled the family finances, the abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief. For example, ordinarily, if you knew or had reason to know that income was omitted from the joint return, or that the other spouse would not or could not pay the tax due on the return, such “knowledge or reason to know” would be a factor weighing against your request for equitable relief. However, if you were abused or unable to challenge the tax treatment or nonpayment because the other spouse controlled the finances, this will favor the granting of relief even if you knew or had reason to know that there was a tax understatement or that the tax would not be paid.
Appeal to Tax Court.
If the IRS denies your request for equitable relief, you may petition the Tax Court for review of the IRS decision. The petition must be filed with the Tax Court no later than the 90th day after the date that the IRS mails its final determination notice to you.