When a married couple files a Married Filing Jointly tax return, the spouses are jointly and severally liable for the tax. To the IRS, this means:
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.[1]
In the case of Yiu v. Commissioner of Internal Revenue[2], the Tax Court was faced with the question of a spouse who was entitled to a reduced tax liability due to innocent spouse relief, but the innocent spouse had already paid the tax at issue.
In Yiu, the IRS determined the taxpayer was not liable for $2,500 of Married Filing Jointly tax liability under IRC § 6015(c), which requires the IRS to grant innocent spouse relief for a divorced or separated spouse who elects separate taxation, with the tax liability being prorated based on each spouses separate income and deductions. This type of innocent spouse relief is referred to as Separation of Liability. The taxpayer met the criteria and the IRS granted innocent spouse relief of $2,500. So what was the problem? The taxpayer had already paid the tax and therefore asked for a refund or credit. The Tax Court pointed out the law: no credit or refund shall be allowed as a result of an election under subsection (c).[3]
All of the taxpayer’s arguments were not disclosed in the opinion and the taxpayer’s legal briefs are not available on Westlaw at the time this article is being written. So whatever the arguments asserted by the taxpayer, they fell on deaf ears with the Tax Court, which ruled, “We have considered all of petitioner’s arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.”[4]
Practice Point: Lest you think that Yiu is an uncommon situation, I also had an innocent spouse case where the taxpayer paid the tax liability against my advice while the innocent spouse case was pending with IRS Appeals. The taxpayer was concerned about how long the innocent spouse case was languishing with the IRS and IRS Appeals. It can take months for the IRS or IRS Appeals to decide an innocent spouse case.
Ultimately, the IRS Appeals granted innocent spouse relief under IRC § 6015(c), just like in Yiu. However, the taxpayer had already paid the tax without it being known to me. I asked for the Appeals Officer to order a refund. She said that she could not. She didn’t know what to do with the tax that had already been paid. Subsection (g) and Yiu answer why: no refund or credit given for innocent spouse relief under IRC § 6015(c). Like in Yiu, ultimately, the taxpayer was granted innocent spouse but denied the refund.
The takeaway is to be very wary about paying the disputed tax liability until the IRS, IRS Appeals, or Tax Court, has ruled. And retain good tax professional advice and follow the advice given.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] https://www.irs.gov/businesses/small-businesses-self-employed/innocent-spouse-questions-and-answers (accessed August 15, 2020).
[2] Tax Court Case No. 23782-18S, 2020 WL 4516015 (T.C. Aug. 5, 2020).
[3] Yiu v. Comm’r of Internal Revenue, at *2 .
[4] Id. at *3.