In a recent Tax Court case, innocent spouse relief was granted to a Florida taxpayer to relieve her from over $400,000 in tax deficiency and penalties. Tax Court typically is reluctant to grant innocent spouse relief when the requesting spouse had knowledge of the underpayment of taxes. However, in Sapp v. Commissioner, T.C. Memo 2015-143, the Tax Court granted innocent spouse relief despite the fact that the requesting spouse was aware of or had reason to know of the tax deficiency, because the Court found that the requesting spouse was a victim of spousal abuse, which afforded her equitable relief.
In Sapp, Mr. and Ms. Sapp filed joint tax returns for years 2004, 2006 and 2008, which were the years in question where the IRS determined substantial tax deficiencies plus penalties. Since the returns were filed jointly, both Mr. and Ms. Sapp were jointly and severally liable for the entire amount of the deficiencies and penalties. Ms. Sapp requested innocent spouse relief. The Court determined that the only relevant relief that might apply to Ms. Sapp was the equitable relief. The Court heavily relied on the following seven factors to analyze whether equitable relief should be granted:
- The requesting spouse filed a joint return for the taxable year for which he or she seeks relief;
- Relief is not available to the requesting spouse under Internal Revenue Code sections 6015(b) or 6015(c);
- The claim for relief is timely filed;
- No assets were transferred between the spouses as part of a fraudulent scheme;
- The non-requesting spouse did not transfer disqualified assets to the requesting spouse;
- The requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and
- The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse’s income. (citation omitted).
In this case, the Court found that Ms. Sapp did not satisfy the seventh factor because she handled the financial aspects of her husband’s business and worked on QuickBooks regarding Mr. Sapp’s business’s income and expenses. However, the Court found that Ms. Sapp was the victim of domestic and mental abuse, and granting the relief outweighed her knowledge of the tax deficiencies. Given the facts, the Court concluded that, "because of the nature of [Mrs. Sapp’s] relationship with Mr. Sapp, she was not in a position to independently determine or question what was on the tax return." Therefore, innocent spouse relief was granted.
The take away from this case is that if a taxpayer believes that he or she might be entitled to innocent spouse relief, the taxpayer should seek professional advice, even if the facts do not appear to initially line up with all the requirements of innocent spouse relief. Exceptions may apply!