"Should Have Known": How the IRS Applies the Reason to Know Test

"I didn't know." Every requesting spouse says it, and many of them are telling the truth. The problem is that, for classic innocent spouse relief, not knowing is not enough. The law asks a harder question: should you have known? If a reasonable person in your position would have caught the problem, you lose under section 6015(b), even if you genuinely had no idea.

This guide explains how that test works, where it appears, and how it changes depending on which kind of relief you are asking for.

Where the test comes from

Internal Revenue Code section 6015(b)(1)(C) requires the requesting spouse to establish that, in signing the return, he or she did not know, and had no reason to know, that there was an understatement. Treasury Regulation 1.6015-2(c) defines the standard: you have knowledge or reason to know of an understatement if you actually knew of it, or if a reasonable person in similar circumstances would have known of it.

Notice the burden. Under 6015(b), you have to establish that you did not know and had no reason to know. The IRS does not have to prove that you did.

The factors the IRS weighs

The same regulation says all the facts and circumstances are considered, and it lists specific ones:

• The nature and size of the item. A $400 unreported dividend on a joint return showing $300,000 of income is easy to miss. A $90,000 consulting fee on a return showing $60,000 of wages is not.
• The couple's financial situation. If the household was spending far more than the reported income could support, the IRS will say that should have raised questions.
• Your education and business experience. A spouse with an accounting degree is held to a different standard than one who never handled the finances.
• Your participation in the activity. If you worked in the business that underreported its income, you will have a hard time claiming you had no reason to know.
• Whether you failed to ask. The regulation specifically mentions whether you failed to inquire, at or before signing, about items on the return or omitted from it that a reasonable person would question.
• Departures from a pattern. If prior returns reported income from an investment and this year's return did not, the IRS treats that change as something you should have noticed.

Revenue Procedure 2013-34, section 4.03(2)(c)(iii), adds a few more for equitable relief cases: deceit or evasiveness by your spouse, your involvement in business or household financial matters, your business or financial sophistication, and any lavish or unusual expenditures compared with past spending.

The duty to ask

The factor that sinks the most claims is the duty of inquiry. The IRS will not accept "I just signed where he told me to sign" as a complete answer. If the return was in front of you, and something on it, or missing from it, would have made a reasonable person ask a question, the law expects you to have asked.

That does not mean you had to audit your spouse. It means you could not ignore the obvious. A missing Schedule C for a business you knew existed. A huge charitable deduction in a year the family could barely pay the mortgage. Rental income that vanished after appearing on every prior return.

On the other side, deceit cuts in your favor. If you asked and your spouse lied, hid statements, used a separate post office box, or told you the IRS had already approved the deduction, document all of it. A reasonable person who asks and gets lied to is in a much better position than one who never asked.

Partial knowledge

Knowing something is not the same as knowing everything. Section 6015(b)(2) gives apportioned relief when you knew there was an understatement but not its extent. Treasury Regulation 1.6015-2(e) illustrates it with an embezzling husband: the wife had reason to know about the $120,000 that flowed through the joint account she managed, but not the other $1,880,000 that stayed in his separate account. She got relief for the larger amount.

The practical lesson: trace the money. The IRS will try to show that you knew about a piece of the problem. Your job is to show where your knowledge ended.

How the standard changes across the three types of relief

This is where many people get confused, because the same facts can produce different results depending on the provision.

Innocent spouse relief, 6015(b)

Reason to know defeats relief. If a reasonable person in your circumstances would have known of the understatement, you lose, except to the extent of apportioned relief for the part you could not have known.

Separation of liability, 6015(c)

Reason to know is irrelevant. Only actual knowledge counts, and the IRS has to prove it. Treasury Regulation 1.6015-3(c)(2)(iii) says actual knowledge may not be inferred when the requesting spouse merely had reason to know. The regulation's gambling example is worth reading: a wife who knew about her husband's gambling habit and separate account had reason to know of his winnings, but did not have actual knowledge, so her election was valid. See the guide to the actual knowledge rule.

Equitable relief, 6015(f)

Knowledge is a factor, not a bar. Revenue Procedure 2013-34 says that if you knew or had reason to know of the item, the factor weighs against relief, but actual knowledge will not be weighed more heavily than any other factor. And if your spouse abused you or controlled the household finances by restricting your access to financial information, and because of that you could not challenge the return for fear of retaliation, the factor weighs in favor of relief even if you knew. See the guide to abuse and financial control.

So the same spouse who loses under 6015(b) because she should have asked about a missing Schedule C might win under 6015(c) because she never actually knew the business earned money, or under 6015(f) because the other factors outweigh her reason to know.

What the IRS actually sees

The IRS does not interview you over coffee. It reads Form 8857, your attachments, and whatever your spouse or former spouse sends in. Treasury Regulation 1.6015-6(b) specifically lists the extent of your knowledge of the erroneous items, your participation in the family business or finances, and your education level as information the nonrequesting spouse may submit.

Assume your former spouse will say you knew everything. Then build the record that shows otherwise:

1. Who prepared the return, and whether you were present.
2. Whether you reviewed it, and what it showed you.
3. Who received and opened financial mail.
4. Which accounts were joint and which were separate, and whether you had online access.
5. Your role, if any, in the business.
6. Your education and work history.
7. Any questions you asked, and the answers you got.
8. How the family's spending compared to the reported income.

The honest assessment

I tell clients the truth about this standard. If you co-owned the business, signed the checks, and kept the books, 6015(b) is probably not your path. That is fine. Separation of liability and equitable relief exist precisely because Congress knew the reason to know test would leave out people who still should not be stuck with the bill.

What matters is that you request every form of relief you may qualify for, and that your facts are presented in a way that answers the question the IRS is going to ask. The guide to section 6015(b) requirements covers the rest of the classic test.

One more point on timing

Knowledge is measured at the time you signed the return. Treasury Regulation 1.6015-2(c) asks whether you knew or had reason to know in signing. What you learned later, during the divorce or the audit, does not count against you on this element, though it may be relevant to other factors.