	Innocent Spouse Provisions

Under the joint and several liability standard, when a married couple files a joint federal income tax return, each spouse becomes individually responsible for paying the entire amount of the tax associated with that return. The provisions allow relief from the joint and several liability standard when the innocent spouse has filed a joint return with the culpable spouse; the innocent 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. IRS denied innocent spouse relief. Estimated Universe of Potential Innocent Spouses

programs. However, our estimate of 587,000 couples represents the maximum number of taxpayers potentially eligible for innocent spouse relief. This is more than would probably actually qualify. Using a 2-percent per year divorce rate, we estimated that 35,000 divorced taxpayers had additional tax assessments of more than $500. Modifying Tax Code Provisions Could Allow More Taxpayers to Qualify for Relief

The current provisions may not ensure that taxpayers receive equitable relief. We estimated that if the dollar thresholds were eliminated, the maximum number of couples filing tax year 1992 returns potentially eligible for innocent spouse relief would have been 1.2 million, which consist of all couples who were assessed additional taxes under IRS’ audit and underreporter programs. Potential Impact of Replacing the Joint and Several Liability Standard With Proportionate Liability

One 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 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. We evaluated the potential effects of these options on IRS’ tax administration processes and taxpayers’ burden. We found that a legislative change to bind IRS to divorce decrees appears impractical for two major reasons. Federal tax matters are the exclusive jurisdiction of the federal courts. Divorce matters, however, are generally handled by state courts. Thus, providing a legal forum where IRS and the parties to a divorce could resolve issues relating to both tax matters and divorce proceedings would require a fundamental and extensive change in either federal tax law or state domestic relations law. Second, binding IRS to divorce decrees could require IRS to become involved in every divorce settlement or trial. 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. Because the income, including wages, of taxpayers living in certain community property states is considered community property, IRS can place a levy on the wages or other separate income of either spouse to satisfy an existing tax debt, even if that tax debt was incurred by the other spouse before their marriage. In contrast, IRS cannot place a levy on the separate income of one spouse to pay the taxes due from the other spouse in a common law state. According to IRS officials, the agency does not have specific procedures for placing levies on a spouse’s income for premarital taxes incurred by the other spouse. Treasury’s Report Parallels Our Administrative Recommendations

Treasury’s February 1998 report indicates that IRS is currently undertaking a number of actions to improve the administration of the current innocent spouse provisions.
Why GAO Did This Study

GAO discussed its report on the innocent spouse provisions of the Internal Revenue Code, focusing on: (1) the universe of taxpayers potentially eligible for innocent spouse relief; (2) the Internal Revenue Service's (IRS) practices and procedures for handling requests for such relief; (3) whether the existing innocent spouse provisions provide the same opportunity for relief 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 that allocate tax liabilities; and (6) the potential effects of limiting IRS' ability to seize community income to satisfy the tax liabilities incurred by one of the spouses before the marriage.

What GAO Found

GAO noted that: (1) under current law, only about 1 percent of couples who filed joint returns in 1992 had additional tax assessments that potentially met the dollar threshold for innocent spouse relief; (2) if only divorced taxpayers were counted, about 35,000 of the 587,000 couples with additional tax assessments of more than $500 for 1992 may have been eligible for innocent spouse relief; fewer would probably actually qualify; (3) the limited information available indicated that IRS received few requests for innocent spouse relief and denied most of them; (4) the current provisions may not ensure that all deserving taxpayers receive equivalent relief; (5) one way to address concerns with the innocent spouse provisions would be to replace the joint and several liability standard with a proportionate liability standard; (6) under this standard, each spouse becomes individually responsible for the entire amount of the tax associated with a joint return; (7) under a proportionate liability standard, couples would be responsible only for the taxes generated by their individual incomes and assets; (8) requiring IRS to be bound by divorce decrees is impractical for two major reasons; (9) first, federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; (10) thus, there is currently no legal forum where IRS and the parties to a divorce could resolve issues relating to both tax and divorce matters; (11) second, this proposal could require IRS to become involved in every divorce settlement to ensure that the government's interest is protected; (12) in community property states, IRS can levy one spouse's income to satisfy the premarital tax debts of the other spouse because of the joint ownership of property in those states; (13) in contrast, IRS cannot levy the income of one spouse to pay the premarital tax debt of the other spouse in common law states because spouses do not have legal entitlement to each other's property; (14) since IRS does not maintain data on how often it levies community property to settle premarital tax debts, 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; and (15) the Department of Treasury's report parallels GAO's report on identifying ways to improve the administration of the current innocent spouse provisions.