The Return Was Right, the Check Never Went Out: Equitable Relief for Unpaid Tax

Here is a story I hear in some form every month. The return was prepared correctly. It showed a balance due. Your spouse said, "I'll take care of it." You signed. Years later, after the marriage fell apart, the IRS starts sending you notices for a balance you thought was paid long ago.

Nothing on the return was wrong. That fact changes everything about which relief you can get.

Why this is different from a typical innocent spouse case

Innocent spouse relief under section 6015(b) and separation of liability under section 6015(c) apply to understatements, meaning tax the return failed to report. When the return correctly reported the tax and it simply was not paid, there is no understatement. There is an underpayment.

The Form 8857 instructions say it plainly: equitable relief is the only type of relief available for an unpaid tax. They define unpaid tax as tax properly shown on your return that has not been paid, and they give an example close to the story above: a joint return showed a $5,000 balance, you gave your former spouse $2,500 and he or she promised to pay the full $5,000, but paid nothing. The unpaid tax is still $5,000, and you are both liable.

So the whole case runs through Internal Revenue Code section 6015(f) and Revenue Procedure 2013-34.

The threshold question: whose income created the balance?

Revenue Procedure 2013-34, section 4.01(7), requires that the liability be attributable, in full or in part, to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. If part of the balance comes from your own income, relief can only be considered for the part attributable to your spouse.

Think about how that plays out. Suppose both spouses earned wages, but your spouse also had self-employment income with no estimated payments. The balance due exists mostly because of your spouse's income. That portion is a candidate for relief. If your own withholding was too low and created part of the balance, that part generally stays with you.

The misappropriation exception

There is an exception that matters a great deal in underpayment cases. Under section 4.01(7)(c), if you did not know and had no reason to know that funds intended for payment of the tax were misappropriated by your spouse for your spouse's benefit, the IRS will consider relief even if the underpayment is attributable in part or in full to your item. Relief is limited to the extent the funds intended for the tax were taken.

If you handed your spouse money for the IRS and it went somewhere else, document that. Bank records showing the transfer to your spouse, a text message promising to pay, anything that shows the money was earmarked for the tax.

The knowledge question in underpayment cases

In an understatement case, the IRS asks whether you knew about the bad item. In an underpayment case, the question in section 4.03(2)(c)(ii) of the revenue procedure is different: as of the date the return was filed, or the date you reasonably believed it was filed, did you know or have reason to know that your spouse would not or could not pay the tax at that time or within a reasonable period after filing?

This factor favors relief if you reasonably expected your spouse to pay. It weighs against relief if it was not reasonable to believe your spouse would or could pay.

What hurts

The revenue procedure gives examples of what makes your expectation unreasonable. If before the return was filed you knew of your spouse's prior bankruptcies, financial difficulties, or other issues with the IRS or other creditors, or you were otherwise aware of difficulties in timely paying bills, the factor will generally weigh against you.

That is a lot of couples. If the household was already behind on the mortgage, already juggling credit cards, already getting IRS notices from prior years, the IRS will say you had reason to know the check was not going out.

What helps: the installment agreement presumption

Here is a provision most people never hear about. Section 4.03(2)(c)(ii) says a reasonable expectation of payment will be presumed if the spouses submitted a request for an installment agreement to pay the tax reported as due. To get the presumption, the request must be filed by the later of 90 days after the payment due date or 90 days after the return was filed. It must detail the plan for paying the tax, interest and penalties, satisfy the liability within a reasonable time, and it must not have been unreasonable for you to believe your spouse could make the payments.

If you and your spouse set up a payment plan promptly and your spouse later stopped paying, that history is valuable. Pull your account transcripts and find out exactly when the installment request was made.

Abuse and financial control

The revenue procedure also says that if your spouse abused you or controlled the household finances by restricting your access to financial information, and because of that you could not question the payment of the taxes or challenge your spouse's assurance about payment for fear of retaliation, the knowledge factor will weigh in favor of relief even if you knew or had reason to know your spouse would not pay. The guide to abuse and financial control explains what evidence the IRS considers.

The other factors still matter

Knowledge is one factor. The rest of section 4.03 applies just as it does in any equitable relief case: marital status, economic hardship, legal obligation, significant benefit, compliance, and health. Two deserve special attention in underpayment cases.

Legal obligation. If your divorce decree assigns the tax debt solely to your former spouse, that factor favors relief, unless you knew or had reason to know when you signed the agreement that your spouse would not pay. The IRS is not bound by your decree, but it does count it. See the guide on why a divorce decree does not bind the IRS.

Significant benefit. If the unpaid tax money went to a boat, a second home or vacations you enjoyed, that weighs against you. If it went into your spouse's separate account, his gambling, or her new household after the separation, that helps you.

And if you are divorced, would suffer economic hardship, and reasonably expected your spouse to pay, you may qualify for streamlined relief under section 4.02 without the full weighing. The guide to the section 6015(f) factors covers that path.

Timing

Because there is no two-year election deadline for equitable relief, people sometimes assume they can wait. Do not. Section 6015(f)(2) lets you ask for relief from an unpaid balance only before the collection statute under section 6502 expires. And interest keeps running the entire time. If you have already paid some of the balance and want it back, the request must be made within the refund claim period. The guide to the equitable relief deadline has the details.

Filing also gives you breathing room. Under section 6015(e)(1)(B), once you request equitable relief, the IRS generally cannot levy for the liability covered by the request until the 90-day Tax Court petition period runs, or, if you petition, until the Tax Court decision becomes final. The Form 8857 instructions add that interest and penalties continue to accrue during that time.

Building the file

In underpayment cases, the evidence is usually less about the return and more about the marriage. I look for:

• Who prepared the return and who handled the payment.
• Texts, emails or notes in which your spouse promised to pay or claimed to have paid.
• Bank records showing whether money was set aside or transferred for the tax.
• Any installment agreement request and its date.
• The household's financial condition when the return was filed: other debts, collection notices, prior IRS problems.
• Your current income and expenses, for the hardship factor.
• Your filing and payment record since the separation.

None of that is complicated. But it has to be gathered, organized and presented. A Form 8857 that just says "my husband was supposed to pay" will not carry the day.