Equitable Relief

If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief.

You may qualify for equitable relief if you meet all of the following conditions.

1. You are not eligible for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income.
2. You and your spouse did not transfer assets to one another as a part of a fraudulent scheme.
3. Your spouse did not transfer assets to you for the main purpose of avoiding tax or the payment of tax. See Transfers of property to avoid tax, earlier, under, Relief by Separation of Liability.
4. You did not file your return with the intent to commit fraud.
5. You did not pay the tax. However, you may be able to receive a refund of:
   1. Amounts paid after July 21, 1998, and before April 16, 1999, and
   2. Certain installment payments made after you file Form 8857.
6. You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. See Indications of unfairness for equitable relief, later.

Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax (defined earlier under Innocent Spouse Relief) or an underpayment of tax (defined next).

Underpayment of tax.   An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2000 return shows that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.

Indications of unfairness for equitable relief.   The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax. The following are examples of positive and negative factors that the IRS will consider to determine whether to grant equitable relief. The IRS will consider all factors and weigh them appropriately.

Positive factors.   The following are examples of factors that weigh in favor of equitable relief.

• You are separated (whether legally or not) or divorced from your spouse.
• You would suffer economic hardship if relief is not granted. (In other words, you would not be able to pay your reasonable basic living expenses.)
• You were abused by your spouse, but the abuse did not amount to duress.
• You did not know and had no reason to know about the items causing the understatement or that the tax would not be paid.
• Your spouse has a legal obligation under a divorce decree or agreement to pay the tax. (This will not be a positive factor if you knew or had reason to know, at the time the divorce decree or agreement was entered into, that your spouse would not pay the tax.)
• The tax for which you are requesting relief is attributable to your spouse.

Negative factors.   The following are examples of factors that weigh against equitable relief.

• You will not suffer economic hardship if relief is not granted.
• You knew or had reason to know about the items causing the understatement or that the tax would be unpaid at the time you signed the return.
• You received a significant benefit from the unpaid tax or items causing the understatement. (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief, on page 4.)
• You have not made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years.
• You have a legal obligation under a divorce decree or agreement to pay the tax.
• The tax for which you are requesting relief is attributable to you.

Examples.   The following examples show situations that may qualify for equitable relief.

Worksheet 1. Worksheet for Figuring Your Separation of Liability (Note: This worksheet is optional. Keep it for your records. Do not mail it to the IRS.)

1.	Enter the net amount of income and deductions taken into account in computing the understatement of tax and allocated to you*			1.	500
2.	Enter the net amount of all income and deductions taken into account in computing the understatement of tax*			2.	2,710
3.	Divide line 1 by 2. Enter the result as a decimal (rounded to at least 3 places)			3.	.185
4.	Enter the understatement of tax*		4.	743
5.	Enter the credits and other taxes taken into account in computing the understatement of tax and allocated to your spouse*	5.	336
6.	Enter the credits and other taxes taken into account in computing the understatement of tax and allocated to you*	6.	0
7.	Add lines 5 and 6		7.	336
8.	Subtract line 7 from line 4			8.	407
9.	Multiply line 8 by line 3			9.	75
10.	Add lines 9 and 6. This is the understatement of tax you are responsible for			10.	75

*This should be shown on the IRS notice or audit report.

Example 1.   You and your spouse filed a joint 2000 return. That return showed you owed $10,000. You had $5,000 of your own money and you took out a loan to pay the other $5,000. You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Without telling you, your spouse took the $5,000 loan and spent it on himself. You and your spouse were divorced in 2001. In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Both of these facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpayment. The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpayment.

Example 2.   You request innocent spouse relief or separation of liability, but the IRS determines you do not qualify for either one. The IRS automatically will consider whether equitable relief is appropriate.

Filled-in Form 8857

This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief.

   Janie and Joe Boulder filed a joint tax return for 2000. Joe did not report a $5,000 award he won that year. They received an IRS Notice of Deficiency for additional tax of $650 and penalties and interest of $165.

Janie applies the conditions listed under Innocent Spouse Relief on page 3 to see if she qualifies for relief.

1. Janie meets the first condition because the joint tax return they filed has an understatement of tax.
2. Janie believes she meets the second condition. She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs.
3. Janie believes she meets the third condition. She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Joe spent it on personal items for his use only.

Because Janie believes she qualifies for innocent spouse relief, she files Form 8857 with the IRS. She fills in her name, address, social security number, and daytime phone number. She fills out the rest of the form as follows:

Line 1.   Janie enters 2000 because this is the tax year for which she is requesting relief.

Line 2.   She enters the name, address, social security number, and daytime phone number of her spouse.

Line 3.   She checks the Yes box because she received an IRS Notice of Deficiency for additional tax.

Lines 4-6.   Janie checks the No box on each of these lines because she and Joe were not divorced, separated, or living apart at all times during the last 12 months.

Line 7.   Janie does not check the box on this line because she checked the No boxes on lines 4, 5, and 6.

Line 8.   Janie checks theYes box on this line because the income items all belonged to her husband. She writes a statement (not illustrated) explaining why she feels she qualifies for innocent spouse relief.

Line 9.   Janie checks the No box on this line because she does not have an underpayment of tax.

Signing and mailing Form 8857.   Janie signs and dates the form. She attaches the explanatory statement (not illustrated) required by the Form 8857 instructions. Finally, she mails the form to the IRS employee named in the Notice of Deficiency before the end of the 90-day period specified in the Notice.

Boulder's filled-in Form 8857

Flowcharts

The following flowcharts provide a quick way for determining whether you may qualify for relief. But do not rely on these flowcharts alone. Also read the earlier discussions.

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Questions & Answers

This section answers questions commonly asked by taxpayers about innocent spouse relief.

What is joint and several liability?

Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.

How can I get relief from joint and several liability?

Relief now falls into three categories: innocent spouse relief, separation of liability, and equitable relief. Each of these types of relief have different requirements. They are explained separately below.

What are the rules for innocent spouse relief?

To qualify for innocent spouse relief, you must meet all of the following conditions.

• You must have filed a joint return which has an understatement of tax.
• The understatement of tax must be due to erroneous items of your spouse (or former spouse).
• You must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax.
• Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
• You must request relief within 2 years after the date on which the IRS first began collection activity against you after July 22, 1998.

What are erroneous items?

Erroneous items are any deductions, credits, or bases that are incorrectly stated on the return, and any income that is not reported on the return.

What is an understatement of tax?

An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return. For example, you reported total tax on your 2000 return of $2,500. IRS determined in an audit of your 2000 return that the total tax should be $3,000. You have a $500 understatement of tax.

Will I qualify for innocent spouse relief in any situation where there is an understatement of tax?

No. There are many situations in which you may owe tax that is related to your spouse, but not be eligible for innocent spouse relief. For example, you and your spouse file a joint return on which you report $10,000 of income and deductions, but you knew that your spouse was not reporting $5,000 of dividends. You are not eligible for innocent spouse relief because you have knowledge of the understatement.

What are the rules for separation of liability?

Under this type of relief, you divide (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse. The understatement of tax allocated to you is generally the amount you are responsible for. To qualify for separation of liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857.

• You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
• You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.

Why would a request for separation of liability be denied?

Even if you meet the requirements listed earlier, a request for separation of liability will not be granted in the following situations.

• The IRS proves that you and your spouse transferred assets as part of a fraudulent scheme.
• The IRS proves that at the time you signed your joint return, you had actual knowledge of any items giving rise to the deficiency that are allocable to your spouse.
• Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax.

What are the rules for equitable relief?

Equitable relief is only available if you meet all of the following conditions.

• You do not qualify for innocent spouse relief, or relief by separation of liability, or relief from separate return liability for community income.
• The IRS determines that it is unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances.
• You and your spouse did not transfer assets to one another as a part of a fraudulent scheme.
• Your spouse did not transfer assets to you for the main purpose of avoiding tax or the payment of tax.
• You did not file your return with the intent to commit fraud.
• You did not pay the tax.

Note. Unlike innocent spouse relief or separation of liability, if you qualify for equitable relief, you can get relief from an understatement of tax or an underpayment of tax. (An underpayment of tax is an amount properly shown on the return, but not paid.)

How do state community property laws affect my ability to qualify for relief?

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, community property laws require you to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability.

How do I request relief?

File Form 8857, Request for Innocent Spouse Relief, to ask the IRS for relief. You only need to file one Form 8857 even if you are requesting relief for more than one year.

If I am denied innocent spouse relief, must I reapply if I believe I might qualify under one of the other two provisions?

No. The IRS automatically will consider whether any of the other provisions would apply.

I only requested equitable relief but the IRS did not grant it. Must I reapply if I believe I might qualify under one of the other two provisions?

Yes. You must affirmatively choose innocent spouse relief or separation of liability in order for the IRS to determine whether or not you qualify for those types of relief.

I applied for innocent spouse relief before the law changed (July 22, 1998). Do I need to reapply?

No. The Service will consider your request under the new law as long as the liability was unpaid as of July 22, 1998. However, if you filed a claim prior to July 22, 1998, and you have not heard from the IRS, contact the IRS office where you sent your claim.

When should I file Form 8857?

If you are requesting innocent spouse relief, separation of liability, or equitable relief, file Form 8857 no later than 2 years after the date on which the IRS first began collection activities against you after July 22, 1998.

Where should I file Form 8857?

Follow the instructions on Form 8857.

I am currently undergoing an examination of my return. How do I request innocent spouse relief?

File Form 8857 with the employee assigned to examine your return.

What if the IRS has given me notice that it will levy my account for the tax liability and I decide to request relief?

All collection activity is suspended from the date the request is received by the Service until the final determination is made.

What is injured spouse relief?

Injured spouse relief is different from innocent spouse relief. When a joint return is filed and the refund is used to pay one spouse's past-due child and/or spousal support, a past-due federal debt, or past-due state income tax, the other spouse may be considered an injured spouse. The injured spouse can claim his or her share of the refund using Form 8379, Injured Spouse Claim and Allocation. To be considered an injured spouse, you must have:

• Filed a joint return,
• Received income (such as wages, interest, etc.),
• Made tax payments (such as withholding or estimated tax payments), or claimed the earned income credit or other refundable credit,
• Reported the income and tax payments on the joint return, and
• An overpayment, all or part of which was applied to the past-due amount of the other spouse.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

• Call the Taxpayer Advocate at 1-877-777-4778.
• Call the IRS at 1-800-829-1040.
• Call, write, or fax the Taxpayer Advocate office in your area.
• Call 1-800-829-4059 if you are a TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

• Find answers to questions you may have.
• Download forms and publications or search for forms and publications by topic or keyword.
• View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.
• View Internal Revenue Bulletins published in the last few years.
• Search regulations and the Internal Revenue Code.
• Receive our electronic newsletters on hot tax issues and news.
• Get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

Phone. Many services are available by phone.
 
 

• Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we evaluate the quality of our telephone services in several ways.

• A second IRS representative sometimes monitors live telephone calls. That person only evaluates the IRS assistor and does not keep a record of any taxpayer's name or tax identification number.
• We sometimes record telephone calls to evaluate IRS assistors objectively. We hold these recordings no longer than one week and use them only to measure the quality of assistance.
• We value our customers' opinions. Throughout this year, we will be surveying our customers for their opinions on our service.

Walk-in. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

• Western part of U.S.:
  Western Area Distribution Center
  Rancho Cordova, CA 95743-0001
• Central part of U.S.:
  Central Area Distribution Center
  P.O. Box 8903
  Bloomington, IL 61702-8903
• Eastern part of U.S. and foreign addresses:
  Eastern Area Distribution Center
  P.O. Box 85074
  Richmond, VA 23261-5074

CD-ROM. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:
 

• Current tax forms, instructions, and publications.
• Prior-year tax forms and instructions.
• Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
• Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at www.irs.gov. The first release is available in mid-December and the final release is available in late January.

IRS Publication 3207, Small Business Resource Guide, is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February. You can get one free copy by calling 1-800-829-3676 or visiting the IRS web site at www.irs.gov.

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