The current innocent spouse provisions allow relief from the joint and several liability standard when the innocent spouse has filed a joint return with the culpable spouse; the spouse did not know and had no reason to know there was a substantial tax understatement (knowledge test); and taking into account all the facts and circumstances, it is inequitable to hold the spouse liable for the additional tax attributable to the substantial understatement of the culpable spouse. To determine the potential effects of changing the current joint and several liability standard to a proportionate liability standard, we used IRS’ Statistics of Income data for tax year 1992, underreporter assessments,and the AIMS database to estimate the number of taxpayers who filed using the “married, filing jointly” status. To determine the potential effects on IRS of requiring it to be bound by divorce decrees, we analyzed the legal ramifications of binding IRS to the terms of lower court decisions. To determine the potential effects on IRS of changing the law to limit its ability to attach community property, we discussed with IRS officials the policies related to the attachment of income and assets of one taxpayer to pay the debts incurred by his or her spouse before the marriage. However, our estimate of 587,000 couples represents the maximum number of taxpayers potentially eligible for innocent spouse relief; fewer would probably actually qualify. Using a 2 percent per year divorce rate, we estimated that 35,000 divorced taxpayers might have been eligible for innocent spouse relief for additional tax assessments of more than $500. However, these publications do not provide any guidance on how to request relief. The fact that taxpayers are commonly using these two approaches to seek innocent spouse relief may indicate that taxpayers are not provided with adequate guidance for seeking relief by IRS. Modifying Tax Code Provisions Could Allow More Taxpayers to Qualify for Relief

Critics of the innocent spouse provisions, such as ABA and AICPA, contend that the current provisions do not ensure that taxpayers receive equitable relief. We estimated that if the federal innocent spouse tax code provisions had been modified to eliminate the dollar thresholds as was done by California, Iowa, Louisiana, and Oklahoma, the maximum number of couples filing tax year 1992 returns potentially eligible for innocent spouse relief would have been 710,000. However, since IRS does not maintain data on how often it collects from the culpable spouse, we could not estimate the size of the potential revenue loss. Potential Impact of Replacing the Joint and Several Liability Standard With Proportionate Liability

An alternative way to ensure that taxpayers are not held liable for their spouses’ taxes would be to replace the joint and several liability standard with a proportionate liability standard. Under the generally accepted definition of proportionate liability, taxpayers would be held responsible only for the taxes generated by their own individual incomes and assets or, for taxpayers living in community property states, for the tax associated with one-half of the community income. Binding IRS to Divorce Decrees Would Be Impractical

Divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled, i.e., one spouse is entirely liable, both spouses are equally liable, or some other permutation. According to certain members of ABA’s Committee on Domestic Relations, a legislative change to bind IRS to divorce decrees appears to be impractical for two major reasons. Divorce matters, however, are generally handled by state courts. Furthermore, IRS officials fear that divorce decrees would be manipulated to reduce tax liabilities. IRS Follows State Property Laws in Collecting Premarital Tax Debts

About 13 million, or 27 percent, of all taxpayers who filed joint returns in 1992 lived in community property states. IRS eventually granted innocent spouse relief for that 1 year.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reported on several issues related to the joint and several liability standard that applies to jointly filed federal income tax returns, focusing on: (1) the potential universe of taxpayers that may be eligible for innocent spouse relief; (2) the Internal Revenue Service's (IRS) practices and procedures for handling requests for innocent spouse relief; (3) whether the innocent spouse provisions provide the same treatment for all taxpayers; (4) the potential effects of replacing the joint and several liability standard with a proportionate liability standard; (5) the potential effects on IRS of requiring it to abide by the terms of divorce decrees when those decrees allocate tax liabilities; and (6) the potential effects on IRS of changing the law so that community income of one spouse cannot be seized to satisfy tax liabilities incurred by the other spouse before their marriage.

What GAO Found

GAO noted that: (1) it estimated that about 587,000 of the 48 million couples who filed joint returns in 1992 had additional tax assessments of more than $500; (2) this estimate represents the maximum number of taxpayers potentially eligible for innocent spouse relief, however, fewer would probably actually qualify; (3) although any taxpayer signing a joint return may seek innocent spouse relief, according to IRS officials, divorced taxpayers are more likely to face the most egregious problems; (4) the limited information that was available indicated that IRS received few requests for innocent spouse relief and denied most of them; (5) GAO observed that IRS publications provide little information on how to request innocent spouse relief and that the publications covering procedures related to the need for relief have no information on relief; (6) critics of the innocent spouse provisions contend that the current provisions do not ensure that all deserving taxpayers receive equivalent relief; (7) GAO estimated that for tax year 1992, an additional 42,600 divorced taxpayers might have been eligible for innocent spouse relief if the dollar thresholds had been eliminated; (8) an alternative way to ensure that taxpayers are not held liable for their spouses' taxes would be to replace the joint and several liability standard with a proportionate liability standard; (9) under such a standard, taxpayers would be responsible only for the taxes generated by their individual incomes and assets or, for taxpayers living in community property states, for the tax associated with one-half of the community income; (10) divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled; (11) requiring IRS to be bound by divorce decrees is impractical for two major reasons; (12) federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; (13) IRS officials also raised related concerns, such as whether their interpretation of lengthy and complex divorce decrees would increase the number of appeals and whether divorce decrees would be manipulated to reduce tax liabilities (14) IRS can treat taxpayers living in community property states differently from taxpayers living in common law states when collecting taxes; and (15) since IRS does not maintain data on how often these levy actions occur, GAO could not assess the potential impact on IRS of changing the law to treat everyone the way it treats taxpayers in common law states.