IRS tax problems are an important area of service our firm provides our clients. We specialize in resolving IRS problems. We have been successful for over 30 years in representing our clients with the IRS.
Our Tax Representation and Resolution services consist of directly negotiating with the IRS:
Offer in Compromise
Reasonable Payment Plans
Penalties and Interest Abatements
Lien and Levy Removals on property
Defending Innocent Spouse
Federal Tax Resolution requires professions to understand the black, white and gray aspects of the IRS Federal Tax Codes. By using our expertise in tax law and over 20 years of practicing we often save our clients thousands, even tens of thousands of dollars, through negotiated settlements with the IRS.
Our clients tax situations are thoroughly examined, and specific course of actions are planned and implemented. Our firm completes all required IRS forms and negotiates in your clients best interest.
Most Taxpayers do not know the IRS tax codes. They depend on our firm to help them deal with the IRS Agent whose job is to Collect Taxes.
Being able to respond quickly to IRS demands is critical to the successful resolution of your tax problem. The difference between success and failure is often a function of responding timely.
Most taxpayers with IRS problems are unable to pay the IRS and are not IRS tax evaders. Our firm is committed to resolving your IRS problem and relieving your IRS pain. We allow you to get on with your financial life.
Offers in Compromise
An Offer in Compromise is an agreement to resolve outstanding tax liabilities between the IRS and a taxpayer(s). The IRS has the authority to settle for less than full payment under certain circumstances. The IRS can compromise with taxpayer(s) for one or all of the following reasons:
Doubt as to Liability - Doubt exists that the assessed tax is correct.
Doubt as to Collectility - Doubt exists that you could ever pay the full amount of tax owed.
Effective Tax Administration - There is no doubt the tax is correct and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows IRS to consider taxpayer(s) offer. To be eligible for a compromise on this basis, taxpayer must demonstrate that collection of the tax would create an economic hardship, unfair and inequitable.
Over 75% of all offers submitted to the IRS are not accepted for numerous reasons. To minimize our clients from getting rejected by the IRS our firm first determines if the taxpayer pre-qualifies for an Offer in Compromise. This is important due to the taxpayers and firms time and money investment in preparing and submitting an offer.
After our firm pre-qualifies the taxpayers for the IRS Offer in Compromise program we then complete the following:
Provide us with pertinent financial information as to personal income , expenses, assets and liabilities.
We prepare required IRS forms and supporting documents:
Completion of Form 433-A Collection Information Statement for Wage Earners or Self-Employed Individuals, or Form 433-B Collection Information Statement for Businesses, as appropriate.
Completion of Form 656 Offer in Compromise
Print, sign and date, all forms
Submit Form 433-A and/or Form 433-B, Form 656, and all supporting information to the appropriate address listed on page 13 of the Offer in Compromise package
Negotiate with IRS to settle taxpayers offer
Consent to reasonable settlement (could be pennies on the dollar) with IRS
Receive IRS official letter of acceptance to taxpayers offer.
New IRS regulations allow taxpayers to initially file an "acceptable for processing" Offer. If its not acceptable the IRS will return the offer explaining why. Taxpayers must wait one year before they can resubmit another offer.
Historically offers have generally taken 6 to 9 months to complete. Hopefully the new IRS Offer in Compromise processing procedures will improve the turn around time.
Reasonable Payment Plans:
For various reasons, Taxpayers are not able to pay their federal individual income tax in full. Our firm informs clients not to delay filing their tax return if unable to pay the tax due. This is important since IRS will assess a failure to file penalty (up to 25% of tax liability) in addition to a failure-to-pay penalty, and interest. If our clients can't pay the amount they owe in full our firm will:
File your tax return on time and attach to the front either a completed Form 9465, Installment Agreement Request
Recommend clients to pay as much as they can with the return to lower the interest and penalty charges.
The IRS will contact us usually within 30 days, whether there request is approved or denied, or if additional information is needed.
As long as taxpayers continue to make the monthly installment payments, IRS will not pursue other methods of enforced collection (i.e. bank or wage levies or seizure of property). Also taxpayers must file and pay their subsequent tax returns on time. Delinquent filing and payments will void the taxpayers IRS Installment Agreement causing enforced collection activity again.
Penalties and Interest Abatements:
IRS by law imposes penalties to ensure that all taxpayers pay their taxes timely.. If a taxpayer underpays their tax due to fraud, they may be subject to a civil fraud penalty. In certain cases, you may be subject to criminal prosecution.
Following are some penalties IRS can assess:
If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. This penalty cannot be more than 25% of your tax, but it is reduced by the failure-to-pay penalty (discussed next) for any month both penalties apply. However, if your return is more than 60 days late, the penalty will not be less than $100 or 100% of the tax balance, whichever is less.
Such penalty can be abated if our firm can show that our client has reasonable cause for not filing on time.
Failure-to-pay penalty. You may have to pay a penalty of 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax.
You may have to pay a penalty of 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax.
Penalty for frivolous return.
You may have to pay a penalty of $500 if you file a return that does not include enough information to figure the correct tax or that shows an incorrect tax amount due to:
A frivolous position on your part, or
A desire to delay or interfere with the administration of federal income tax laws.
This penalty is in addition to any other penalty provided by law.
Generally an accuracy-related penalty of 20% applies to any underpayment due to:
Negligence or disregard of rules or regulations, or
Substantial understatement of income tax.
The total accuracy-related penalty cannot exceed 20% of the underpayment.
Such penalty can be abated if our firm can show that our client has reasonable cause accompanied by good faith.
Negligence includes the lack of any reasonable attempt to comply with provisions of the Internal Revenue Code.
Disregard includes the careless, reckless, or intentional disregard of rules or regulations.
Substantial understatement of income tax.
For an individual, income tax is substantially understated if the understatement of tax exceeds the greater of:
10% of the correct tax, or
Information reporting penalties.
Any person who does not file an information return or a complete and correct information return with the IRS by the due date is subject to a penalty for each failure. A penalty applies to information returns as follows:
Correct information returns filed within 30 days after the due date, $15 each.
Correct information returns filed after the 30-day period but by August 1, $30 each.
Information returns not filed by August 1, $50 each.
Maximum limits apply to all these penalties.
Failure to furnish correct payee statements.
Any person who does not provide a taxpayer with a complete and correct copy of an information return (payee statement) by the due date is subject to a penalty of $50 for each statement. If the failure is due to intentional disregard of the requirement, the penalty is the greater of:
$100 per statement, or
10% or 5% (depending on the type of statement) of the amount to be shown on the statement.
Identification numbers and other information.
Any person who does not comply with other specified reporting requirements, including the use of correct identification numbers (employer identification numbers and social security numbers), is subject to a penalty of $50 for each failure.
The law provides penalties for failure to file returns or pay taxes as required.
If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, file a frivolous return, or fail to supply your social security number. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.
If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is based on the tax not paid by the due date (without regard to extensions). The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%.
If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.
Return over 60 days late.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100% of the unpaid tax.
Such penalty can be abated if our firm can show that our client has failed to file on time because of reasonable cause and not because of willful neglect.
Paying tax late.
You will have to pay a failure-to-pay penalty of 1/2 of 1% of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid.
This penalty does not apply during the extension period available by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, if you paid at least 90% of your actual tax liability before the original due date of your return through withholding on wages, estimated tax payments, or a payment sent in with Form 4868.
If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued.
This penalty cannot be more than 25% of your unpaid tax. You will not have to pay the penalty if you can show that you had a good reason for not paying your tax on time. This failure-to-pay penalty is added to interest charges on late payments.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100% of the unpaid tax.
You may have to pay an accuracy-related penalty if:
You underpay your tax because of either "negligence" or "disregard" of rules or regulations, or
You substantially understate your income tax.
The penalty is equal to 20% of the underpayment. The penalty will not be figured on any part of an underpayment on which a fraud penalty (discussed later) is charged.
Negligence or disregard.
The term "negligence" includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You will not have to pay a negligence penalty if our firm can show that you have a reasonable basis for a position you took.
The term "disregard" includes any careless, reckless, or intentional disregard.
The penalty is based on the part of the underpayment due to negligence or disregard of rules or regulations, not on the entire underpayment on the return.
Such penalty can be abated if our firm can show that our client has adequately disclosed on their return a position that has at least a reasonable basis.
Substantial understatement of income tax.
You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. However, the penalty is reduced to the extent there is:
Substantial authority, or
Adequate disclosure and a reasonable basis.
Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours.
The understatement may also be reduced if our firm can show that our client has adequately disclosed the relevant facts about their tax treatment of an item.
You will not have to pay a penalty if our firm can show that our client has a good reason (reasonable cause) for the way you treated an item. We must also show that you acted in good faith.
You may have to pay a penalty of $500 if you file a frivolous return. A frivolous return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.
You will have to pay the penalty if you filed this kind of return because of a frivolous position on your part or a desire to delay or interfere with the administration of federal income tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.
This penalty is added to any other penalty provided by law.
The penalty must be paid in full upon notice and demand from IRS even if you protest the penalty.
If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax.
The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.
Failure to supply social security number.
If you do not include your social security number (SSN) or the SSN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. You will also be subject to the penalty of $50 if you do not give your SSN to another person when it is required on a return, statement, or other document.
You will not have to pay the penalty if our firm can show that our client is able to show that the failure was due to reasonable cause and not willful neglect.
Failure to furnish tax shelter registration number.
A person who sells (or otherwise transfers) to you an interest in a tax shelter must give you the tax shelter registration number or be subject to a $100 penalty. If you claim any deduction, credit, or other tax benefit because of the tax shelter, you must attach Form 8271, Investor Reporting of Tax Shelter Registration Number, to your return to report this number. You will have to pay a penalty of $250 for each failure to report a tax shelter registration number on your return. The penalty can be excused if you have a reasonable cause for not reporting the number.
You may be subject to criminal prosecution (brought to trial) for actions such as:
Willful failure to file a return, supply information, or pay any tax due,
Fraud and false statements, or
Preparing and filing a fraudulent return.
Penalties and interest will be charged on the balance due even if you have an approved installment agreement. IRS makes a distinction between taxpayers making a sincere effort to pay their debt and taxpayers who show little or no evidence of cooperation. If taxpayers neglect or refuse to make payment or other arrangements to satisfy their debt the IRS may take enforced collection action.
Today taxpayers have more “rights as a taxpayer” then in the past. Our firm educates our clients about those rights. We recommend taxpayers to read various IRS printed information on your rights as a taxpayer, making arrangements to pay your bill, installment agreements, and what happens when you take no action to pay, order Publication 594, Understanding the Collection Process; and Publication 1, Your Rights As a Taxpayer.
Lien and Levy Removals on property
IRS will not issue a lien if:
The liability has been paid, is not correct or credits are available to fully satisfy it.
Bankruptcy has been filed.
The taxpayer is a defunct corporation (unless assets are about to be liquidated).
The taxpayer corporation has gone through liquidation.
An IMF taxpayer promises to full pay within 6 months (ACS only).
The taxpayer is deceased and there are no assets to be liquidated.
The taxpayer lives abroad and there are no known assets in the United States.
Before the IRS files a Notice of Federal Tax Lien the IRS must assess the liability,send the taxpayer a notice and demand for payment and the taxpayer must neglect or refuse to fully pay the liability within 10 days of notice and demand.
The IRS will issue a Release of the Notice of Federal Tax Lien within 30 days after the taxpayer satisfies the tax due or within 30 days after the IRS accepts a bond guaranteeing payment.
A lien will release automatically if the IRS does not refile the lien before the time expires to legally collect the tax (usually 10 days).
A taxpayer may sue the Federal government for damages if the IRS knowingly or negligently fails to release a Notice of Federal Tax Lien provided the taxpayer first exhausts all administrative appeals within the IRS and the suit is filed within 2 years from the date the IRS should have released the lien.
Each application for a discharge of a tax lien releases the effects of the lien against one specific piece of property. A Certificate of Discharge will be issued if the taxpayer has other property, subject to the lien, that is worth at least two times the total of the tax owed, plus any additions to the tax owed and any other debts owed on the property (e.g., a mortgage).
A Certificate of Discharge will be issued if the IRS receives the value of the government's interest in the property and taxpayer is giving up ownership. A Certificate of Discharge will also be issued if the property in question is sold and there is a dispute as to who is entitled to the sale proceeds, and the proceeds are placed in escrow while the dispute is being resolved.
The IRS must withdraw a filed Notice of Tax Lien if the notice was filed prematurely or not in accordance with IRS procedures.
The IRS must withdraw a filed Notice of Tax Lien if the taxpayer has entered into an installment agreement to satisfy the liability.
The IRS must withdraw a filed Notice of Tax Lien if the withdrawal will facilitate collection of the tax or if the withdrawal would be in the best interest of both the taxpayer (as determined by the Taxpayer Advocate) and the government.
A lien is incorrect and may be appealed if:
the taxpayer paid the entire amount owed before the lien was filed
the IRS assessed the tax and filed the lien when the taxpayer was in bankruptcy and subject to the automatic stay during bankruptcy
the IRS made a procedural error in making an assessment
the statute of limitations expired before the IRS filed the lien.
Release of Levy:
Levy must be released if the IRS determines that the levy is creating an economic hardship due to the financial condition of the taxpayer.
The IRS must release a wage levy, as soon as practicable, upon agreement with the taxpayer that the tax is not collectible. Examples would include situations where the wage levy is creating an economic hardship on the taxpayer and situations where the levy does not yield any net proceeds to the IRS following the calculation of the taxpayer's exempt amount under I.R.C.
No Equity Procedures:
Current law provides that "no levy may be made" if the amount of the IRS expenses from the levy and sale exceed the fair market value of the property at the time of the seizure IRS has general guidelines for seizures, including verifying whether estimated expenses of levy and sale will exceed the fair market value of the property to be seized. However, in practice this could not always be done before a levy was made but is instead done while preparing for the sale. If it were determined after the seizure there would be insufficient sale proceeds, then the levy was released. It also requires the revenue officer to verify the liability of the taxpayer and determine if any other alternate means of collection are available.
The only exception to this procedure is where there has been a pyramiding of employment taxes where seizure is taken to collect the taxes to prevent further pyramiding. Without such action, the business would continually run up tax liabilities.
The IRS can levy on all non-exempt property of a taxpayer. Examples of types property are exempt or partially exempt from levy:
Books and tools of a trade, business or profession which did not exceed in the aggregate $3,125, adjusted for inflation.
Fuel, provisions, furniture, and personal effects in the taxpayer's household, and arms for personal use, livestock, and poultry of the taxpayer which did not exceed in the aggregate $6,250, adjusted for inflation.
Defending Innocent Spouse:
Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. 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 even if all the income was earned by the other spouse.
In some cases, a spouse will be relieved of the tax, interest, and penalties on a joint tax return. Three types of relief are available.
Innocent spouse relief.
Separation of liability.
You can only qualify for equitable relief if you do not qualify for innocent spouse relief or relief by separation of liability.
Requesting Innocent Spouse Relief:
Our firm will complete and file Form 8857 to ask the IRS for Innocent spouse release. We must attach a statement to Form 8857 explaining why you believe you qualify for relief.
The IRS will review your Form 8857, figure the understatement or underpayment of tax and related interest and penalties, and let you know if you qualify.
We must file Form 8857 no later than 2 years after the date on which the IRS first attempted to collect the tax from our clients. An example of an attempt to collect the tax from you is garnishment of your wages.
The IRS is required to inform your spouse (or former spouse) if you request innocent spouse relief or separation of liability, and to allow your spouse (or former spouse) to participate in the determination of the amount of relief from liability.
After we file Form 8857 to request innocent spouse relief or relief by separation of liability, we can ask the United States Tax Court to review your request in the following two situations.
We disagree with the IRS' determination notice telling you the extent to which your request for relief has been denied.
We have not received a determination notice from the IRS within 6 months from the date you filed Form 8857.
The United States Tax Court is an independent judicial body and is not part of the IRS.
We must file a petition with the United States Tax Court in order for it to review your request for relief. We must file the petition during the 90-day period beginning on the date the IRS mails its determination notice to you. If we do not file a petition, or file it late, the Tax Court cannot review your request for relief.
Community Property Laws:
We must generally follow community property laws when filing a tax return if you are married and live in a community property state. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, community property laws require you to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability.
Married persons who filed separate returns in community property states have two ways to get relief.
Relief from separate return liability for community income. You are not responsible for reporting an item of community income if all the following conditions exist.
You filed a separate return for the tax year.
You did not include an item of community income in gross income on your separate return.
You establish that you did not know of, and had no reason to know of, that community income.
Under all facts and circumstances, it would not be fair to include the item of community income in your gross income.
If you do not qualify for the relief described above and are now liable for an underpayment or understatement of tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief
Innocent Spouse Relief:
By us requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse did something wrong on your tax return. The tax, interest, and penalties that qualify for relief can only be collected from your spouse. However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse.
You cannot be granted relief from household employment taxes that are reported on Form 1040.
You must meet all of the following conditions to qualify for innocent spouse relief.
You filed a joint return which has an understatement of tax due to erroneous items (defined later) of your spouse.
You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax.
Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
Understatement of Tax
An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.
The IRS will figure the understatement of tax due to erroneous items of your spouse after we file Form 8857.
Partial relief when extent of understatement is unknown. You may qualify for partial relief if, at the time you filed your return, you knew or had reason to know, that there was an understatement of tax due to your spouse's erroneous items, but you did not know how large the understatement was. You will be relieved of the understatement to the extent you did not know about it and had no reason to know about it.
At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. This resulted in a much larger understatement of tax than you knew about at the time you signed your return. You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. The understatement of tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. The understatement of tax due to the $5,000 of gambling winnings will not qualify for relief.
Erroneous items are either of the following.
Unreported income. This is any gross income item received by your spouse that is not reported.
Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your spouse.
The following are examples of erroneous items.
The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C (Form 1040), but never paid for any advertising.
The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.
No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs.
Indications of Unfairness for Innocent Spouse Relief
The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understatement. Two indicators the IRS may use to decide that it is unfair to hold you responsible for the tax are whether you:
Received any significant benefit from the understatement of tax, or
Were later divorced from or deserted by your spouse.
You can receive significant benefit either directly or indirectly. For example, if your spouse did not report $10,000 of income on your joint return, you can benefit directly if your spouse shares that $10,000 with you. You can benefit indirectly from the unreported income if your spouse uses it to pay extraordinary household expenses.
You do not have to receive a benefit immediately for it to be significant. For example, money your spouse gives you several years after he or she received it or amounts inherited from your spouse (or former spouse) can be a significant benefit.
Support payments that you receive as a result of a divorce proceeding are not a significant benefit.
Relief by Separation of Liability
Under this type of relief, we allocate (divide) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). The understatement of tax allocated to you is generally the amount you are responsible for.
We can request this type of relief whether or not you request innocent spouse relief.
To request relief by separation of liability, you must have filed a joint return and meet either of the following requirements at the time we file Form 8857.
You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
You were not a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.
Burden of proof.
You have the burden of proof in establishing the basis for separating your liability.
Even if you meet the requirements discussed previously, a request for separation of liability will not be granted in the following situations.
The IRS proves that you and your spouse transferred assets as part of a fraudulent scheme.
The IRS proves that at the time you signed your joint return, you had actual knowledge of any items giving rise to the deficiency that were allocable to your spouse.
Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax.
In the above two situations a request will be denied only for the part of the deficiency due to the incorrect items about which you had actual knowledge, or to the extent of the value of the property transferred. If you establish that you signed your joint return under duress, then it is not a joint return, and you are not liable for amounts from that return. However, you may be required to file a separate return for that tax year.
Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. The IRS audited their return and found that Bill did not report $20,000 of self-employment income. The additional income resulted in a $6,000 understatement of tax, plus interest and penalties. After obtaining a legal separation from Bill, Karen filed Form 8857 to request relief by separation of liability. The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Bill is liable for all of the understatement of tax, interest, and penalties because all of it was due to his unreported income. Karen is also liable for the understatement of tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. The IRS can collect the entire deficiency from either Karen or Bill.
Transfers of property to avoid tax:
If your spouse transfers property to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the value of the property transferred. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency allowing you an opportunity for a meeting in the IRS Appeals Office. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if you establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax.
We will figure your separation of liability and figure any related interest and penalties after we file a completed Form 8857 with the required attachment.
If you do not qualify for innocent spouse relief or separation of liability, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief.
You may qualify for equitable relief if you meet all of the following conditions.
You are not eligible for innocent spouse relief or relief by separation of liability.
You and your spouse did not transfer assets to one another as a part of a fraudulent scheme.
Your spouse did not transfer assets to you for the main purpose of avoiding tax or the payment of tax. See Transfers of property to avoid tax, earlier, under, Relief by Separation of Liability.
You did not file your return with the intent to commit fraud.
You did not pay the tax. However, you may be able to receive a refund of:
1. Amounts paid after July 21, 1998, and before April 16, 1999, and
2. Certain installment payments made after you file Form 8857.
You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax.
Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax (defined earlier under Innocent Spouse Relief) or an underpayment of tax
An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2000 return shows that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.
Indications of unfairness for equitable relief. The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax. The following are examples of positive and negative factors that the IRS will consider to determine whether to grant equitable relief. The IRS will consider all factors and weigh them appropriately.
The following are examples of factors that weigh in favor of equitable relief:
You are separated (whether legally or not) or divorced from your spouse.
You would suffer economic hardship if relief is not granted. (In other words, you would not be able to pay your reasonable basic living expenses.)
You were abused by your spouse, but the abuse did not amount to duress.
You did not know and had no reason to know about the items causing the understatement or that the tax would not be paid.
Your spouse has a legal obligation under a divorce decree or agreement to pay the tax. (This will not be a positive factor if you knew or had reason to know, at the time the divorce decree or agreement was entered into, that your spouse would not pay the tax.)
The tax for which you are requesting relief is attributable to your spouse.
The following are examples of factors that weigh against equitable relief:
You will not suffer economic hardship if relief is not granted.
You knew or had reason to know about the items causing the understatement or that the tax would be unpaid at the time you signed the return.
You received a significant benefit from the unpaid tax or items causing the understatement. (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief, on page 4.)
You have not made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years.
You have a legal obligation under a divorce decree or agreement to pay the tax.
The tax for which you are requesting relief is attributable to you.
The following examples show situations that may qualify for equitable relief:
You and your spouse file a joint 1998 return. That return shows you owe $10,000. You have $5,000 of your own money and you take out a loan to pay the other $5,000. You give 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Without telling you, your spouse takes the $5,000 loan and spends it on himself. You and your spouse were divorced in 1999. In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Both of these facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpayment. The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpayment.
You request innocent spouse relief or separation of liability, but the IRS determines you do not qualify for either one. The IRS automatically will consider whether equitable relief is appropriate.
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