Bar News - February 17, 2016
Tax Law: Financial Abuse: Getting Tax Relief for Victims of Domestic Violence
By: Kerstin Cornell
When one thinks about domestic violence cases, financial abuse and tax liability are not typically what first springs to mind.
The immediacy of helping a survivor create safe physical distance from an abuser commonly places focus on securing a restraining order. Because obtaining restraining orders requires showing imminent and credible threats, physical, sexual, and emotional abuse tend to be the focus in petitions. Unfortunately, financial abuse can have equally far-reaching consequences and create sometimes more difficult hurdles for an abused spouse to overcome in order to escape the control of an abuser.
Financial abuse can take many forms, including sabotaging employment opportunities, denying access to bank accounts, tracking and controlling all money earned and spent by the abused spouse, as well as bullied filing of inaccurate joint tax returns. Each of these forms of financial abuse result in vulnerability. However, because joint tax returns create joint and several financial liability for any and all tax debt, pressuring a spouse to sign an inaccurate joint return creates a long-term legal tie between the parties and often incurs a tax liability the survivor may never independently be able to repay. Innocent spouse tax relief provides a legal remedy for survivors who have faced this type of abuse.
Provided under Internal Revenue Code section 6015, innocent spouse relief takes three forms – traditional relief, separation of liability, and equitable relief. A variety of factors should be considered to determine which type of relief to seek, including the marital status of the parties; the extent to which the requesting spouse knew, or had reason to know the return was inaccurate; whether it would be unfair to impose the liability on the requesting spouse; and whether the requesting spouse is seeking a refund for any amount of debt already paid.
Traditional relief is provided under section 6015(b). This relief applies only to an understatement, not an underpayment, of tax. The requesting spouse has the burden of proving that at the time of signing, the requesting spouse had neither actual nor constructive knowledge that the return was inaccurate, and that it would be inequitable to hold the requesting spouse liable for the debt. The relief must be sought no later than two years after the IRS begins collection activity.
Separation of liability is provided under section 6015(c). This relief also applies only to understatement cases, and it applies only to particular items not attributable to the requesting spouse. The burden of proof in separation of liability cases is split between the requesting spouse and the IRS. To merit this relief, the requesting spouse must prove that the parties are divorced, legally separated, or not living in the same house for at least 12 months prior to filing, and that the item giving rise to the deficiency is attributable to the non-requesting spouse. The IRS has the burden to prove that the requesting spouse had actual knowledge of the item(s) giving rise to the deficiency.
Equitable relief, provided under section 6015(f) is significantly different from traditional relief and separation of liability. It is the newest and most powerful form of relief available to survivors of domestic violence because it applies to understatement as well as underpayment cases, and the knowledge factor is strongly mitigated by the presence of abuse.
Specifically, the requesting spouse can be found to meet the knowledge element simply upon a showing of abuse so significant that it interferes with the requesting spouse’s ability to reason independently or overcome the demands of the non-requesting spouse. Moreover, a requesting spouse has essentially two chances to obtain a remedy under equitable relief. First through streamlined review, and, if that fails, upon consideration of a set of non-exclusive factors.
Streamlined review is available if seven threshold conditions and three elements are met. The conditions are as follows: 1) the requesting spouse filed a joint return; 2) relief is not available under code section 6015(b) or (c); 3) the claim for relief is timely filed; 4) no assets were transferred between the spouses as part of a fraudulent scheme; 5) the non-requesting spouse did not transfer disqualified assets to the requesting spouse; 6) the requesting spouse did not knowingly participate in the filing of an inaccurate joint return; and 7) generally, the income tax liability for which relief is sought must be attributable to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse’s income.
If the seven threshold conditions are met, the requesting spouse must satisfy three elements in order to qualify for streamlined review: 1) the requesting spouse is legally separated, living apart, or divorced from the non-requesting spouse; 2) the taxpayer will suffer economic hardship if the IRS does not grant relief from the liability; and 3) the requesting spouse had no knowledge or reason to know of the return’s inaccuracies. This final element is subject to considerations regarding the presence of abuse as noted above.
If the requirements for streamlined review are not met, a requesting spouse may still be able to access relief upon a secondary review. This review does not require meeting conditions or elements. Rather, relief is based on consideration of a set of non-exclusive factors taking into consideration all the facts and circumstances presented. This non-exclusive list of factors includes: marital status; economic hardship; knowledge or reason to know; past compliance with income tax laws; and mental or physical health. The presence of abuse can impact the consideration of all factors.
Filing an inaccurate joint tax return is a means of exercising great control over a survivor for long after the relationship has ended. Because tax liability can result in levies, tax liens, and destruction of credit, its imposition can inhibit, if not prevent, a survivor of domestic violence from breaking free from an abuser to move forward in life. Innocent spouse tax relief can provide a vital legal remedy to allow survivors financial freedom from their abusers.
Kerstin Cornell is a staff attorney at the Low-Income Taxpayer Project, part of the Pro Bono Referral Program at the New Hampshire Bar Association.