Innocent Spouse Relief (Tax Example)

 I. Relevant Facts

           For the 2016 calendar year, Charles Smith (“Mr. Smith”) and his wife Brandy filed a joint federal income tax return. The 2016 return was selected for audit in 2018, and now, the IRS is attempting to collect taxes from Charles related to the 2016 joint federal income tax return. The audit resulted in the following three agreed-upon adjustments: (1) the return failed to include $50,000 in rental income from the farmland Brandy inherited upon the death of her second husband; (2) the return overstated deductions for “Brandy’s House of Hair” hair-styling salon by $165,000; and (3) the return contained $60,000 in unallowable deductions for “Mental Flatlines by Charles.” The IRS assessed the unpaid tax, along with interest and penalties, for a grand total of $94,132 in 2018. Charles is not sure how (because Brandy “took care of all the tax stuff”), but the IRS never got paid. Last week, the IRS contacted Charles about payment of the tax, interest, and penalty for 2016 and told him he could face a levy on his brokerage account to pay the tax. 

This was not the first time the IRS took collection action against Charles. A Notice of Federal Tax Lien was filed against him and Brandy for 2016 more than two years ago and a small levy took place in August of 2018. The amount owed on the 2016 return is now in excess of $100,000. The couple’s tax preparer, Ajax Tax Service, indicates the following additional information concerning the IRS assessment: (1) the $50,000 in rental income can be traced directly into a checking account maintained by Brandy at the Sixth National Bank of Brandon, Iowa (the small town closest to the farmland she inherited); (2) the overstated deductions of $165,000 were listed as “other expenses” on the Schedule C for Brandy’s House of Hair, but actually represent the total of Brandy’s almost daily cash withdrawals for “walking around money;” and (3) the $60,000 in disallowed deductions for Mental Flatlines by Charles represents a mistake Charles made in filling out the preparer’s questionnaire for the 2016 Form 1040. The question asked how much Charles spent on books and publication for his business. He intended to write in $600, but by mistake he entered $60,000. Because he was unable to substantiate even the actual $600 amount, the IRS disallowed the entire $60,000.

           According to Charles, the two LLC’s, Brandy’s House of Hair and Charles’s Mental Flatlines were reported as separate Schedule C sole proprietorships. Each of the LLCs are disregarded single member LLCs with Brandy being the sole owner of the hair business and Charles being the sole owner of Mental Flatlines. Charles was only vaguely aware that Brandy owned inherited farmland; however, he was totally unaware that she receives $50,000 per year in rent from the farm. Additionally, he has nothing to do with her hair business, he’s is not a numbers person. He only knows that last year, the business netted an income of $25,000.

A few years ago, Charles inherited stock worth about $75.000, and Brandy provides Charles with a weekly spending allowance of $900. Brandy also pays all the bills for both her LLC and Charles’s, and their house is paid for. Charles has never handled the household checkbook, and he has no interest in doing so. Charles says that the $59,400 overstatement of his books and publications expense was just a mistake. Charles and Brandy signed the income tax return in question at 5:30 PM, on October 15, 2017 (the last day of the extended due date). They barely had time to stop off at the Ajax Tax Service office on their way to catch the 7:00 PM non-stop flight to London. Importantly, Charles was not under any duress in connection with signing the return. And the return was about $160,000 less than the couple’s past few returns.

           Three weeks ago, Brandy moved in with one of her stylists, and she informed Charles that she was not sure if she would ever come back because she was in love with the stylist. Charles on the other hand, stated he was still in love with her, and that he believed she would come back once this affair was over. Charles graduated from high school and almost completed an Associate’s Degree in Philosophy. And his wife, Brandy has a degree in Economics from Boston College and a Masters in Accounting from the University of Virginia. They have both always lived in Colorado, which is not a community property state. And there have never been any transfers of property between Charles and Brandy.

             There have been no other proceedings in connection with the 2016 tax. Charles timely filed a married filing separately tax return for 2019 but made no estimated tax payments and owes the IRS $2,256 for 2019. Charles has not made any estimated tax payments for 2020.

II. Issue

At issue here is whether Mr. Smith qualifies for innocent spouse relief under I.R.C. section 6015.

III. Conclusion

           Mr. Smith’s joint return for the 2016 calendar year was opened for audit by the IRS in 2018. The IRS never got paid, they gave two prior notices of tax levy more than two years ago, and another one in 2018. Mr. Smith was provided notice of this deficiency more than two years ago. And as such, he will be barred from requesting innocent spouse relief under I.R.C. section 6015 subsection (b) or (c). However, the Tax Court will likely grant Mr. Smith relief under subsection (f) because it does not have the two-year filing limitation, and he meets the seven threshold factors under Rev. Proc. 2013-34 section 4.01. He does not meet the factors for a streamlined request under 4.02, but he does meet the factors for equitable relief under section 4.03. Under 4.03, three factors favor relief, four factors are neutral, and one factor is against relief. Therefore, weighing the totality of the facts and circumstances, Mr. Smith will be afforded relief under I.R.C. 6015 subsection (f), as it relates to the $50,000 in rental income, and the $165,000 in overstated deductions for Brandy’s salon. However, he will not be granted relief for the portion of the tax that relates to his $60,000 in deductions, which he made due to a clerical error.

IV. Rules

A.  I.R.C. section 6015 states that an individual who has filed a joint return may elect to seek relief under subsection (b), and if that individual is eligible to make such election, such an individual may, elect to limit such liability for any deficiency with respect to such return in the manner prescribed under subsection (c). I.R.C § 6015(a).

B.   I.R.C. section 6015 subsection (b) states, if a joint return has been made for the taxable year, and on such return, there is an understatement due to erroneous items of one individual filing the joint return, the other individual did not know, and had no reason to know, there was such an understatement, the other individual shall be relieved of the tax liability. I.R.C. § 6015(b)(1). However, the benefits of relief under subsection (b) are limited to two years after which the Secretary has begun collection activities with respect to the individual making the election. Id.

C.    I.R.C. section 6015 subsection (c) only provides relief to individuals that are no longer married or who are legally separated “under state law” or not living together at any time during the 12-month period ending on the date of request. I.R.C. § 6015(c)(3). This subsection is also limited to a period of two years for relief request. Id.

D.  For legal separation or dissolution, one of the spouses must petition the court for a decree. Colo. Rev. Stat. § 14-10-106. “If a party requests a decree of legal separation rather than a decree of dissolution of marriage, the court shall grant the decree in that form unless the other party objects.” Id.  

E.   I.R.C. section 6015 subsection (f) states that an individual may be entitled to equitable relief, if in totality of the facts and circumstances, it would be inequitable to hold the individual liable for any unpaid tax, and relief is not available to such individual under subsection (b) or (c). I.R.C. § 6015(f). Importantly, this subsection does not have the two-year request limitation. Rev. Proc. 2013-34.

F.   Subsection (e) expressly grants the Tax Court jurisdiction under subsections (b), (c), or (f). I.R.C. § 6015(e)(1)(a).

V. Law

A.  2011 IRB LEXIS 416 (I.R.S. July 25, 2011)

In 2011, the IRS released an update that expanded the time within which individuals may request equitable relief under I.R.C. section 6015(f). 2011 IRB LEXIS 416 (I.R.S. July 25, 2011). For married individuals who file a joint return, each spouse is jointly and severally liable, under section 6013(d). Id. However, an innocent spouse may find relief from joint and several liability under section 6015. Id. The relief provided under 6015(a) and (b) are limited because a taxpayer must petition for relief under those sections within two years, or relief is barred. Id. Circuits were split over whether to apply the two-year limitation to subsection (f). Id.

           This update clarified section 6015(f), stating that individuals who request equitable relief under section 6015(f) will no longer be required to submit a request for equitable relief within two years of the IRS’s first collection activity against the requesting party. Id. Specifically, “[i]ndividuals may request equitable relief under section 6015(f) after the date of this notice without regard to when the first collection activity was taken.” Id.  

B.   2013 IRB LEXIS 478 (I.R.S. September 16, 2013)

On January 5, 2012, the Department of the Treasury and the IRS released Notice 2012-8, 2012-4 I.R.B. 309, which proposed a revenue procedure update, which would update and revise Rev. Proc. 2003-61. 2013 IRB LEXIS 478 (I.R.S. September 16, 2013). Notice 2012-8 also modified and clarified the requirements for equitable relief, and it removed the two-year rule for filing a claim for relief in Notice 2011-70, 2011-2 C.B.135. Id. at 5. This revenue procedure update superseded Rev. Proc. 2003-61. Id. at 6. This revenue procedure only had a few significant changes, a few of the changes are; greater deference to the presence of abuse, removed the two year filing request limitation on equitable relief under section 6015(f) or section 66(c), clarified that relief may still be appropriate if the number of factors weighing against relief exceeds the number of factors weighing in favor, a lack of economic hardship does not weigh against relief, and the knowledge factor takes into consideration abuse or financial control. Id. at 6-11.

In order for a requesting spouse to be eligible for equitable relief under section 6015(f), all 7 of the section 4.01 threshold requirements must be met. Id. at 13. Furthermore, a requesting spouse that meets all of the threshold factors must also show that the factors under section 4.03 also weigh in favor of relief. Id. at 21. Section 4.03 sets out seven official factors but notes that is it is not an exhaustive list, other factors relevant to a specific claim for relief may also be considered. Id. at 22.

C.  Welwood v. Commissioner, T.C. Memo 2019-113

In Welwood v. Commissioner, the court determined that the petitioner met all seven threshold requirements to be considered for relief under I.R.C. 6015(f). Welwood v. Commissioner, T.C. Memo 2019-113. The conditions for relief under Rev. Proc. 2013-34 section 4.01 are considered threshold or mandatory conditions. The requesting spouse must satisfy all seven threshold requirements to be considered for relief. Id. at 14. The commissioner will grant streamlined relief if the requesting spouse also meets the requirements under 4.02, and if not, the Commissioner will determine whether relief is appropriate by weighing the equitable factors under 4.03. Id.  

In Welwood, the key threshold factor that the court considered was factor four. The respondent argued that the petitioner’s actions of reconveying partnerships to her husband and filing separate returns for 2016, as recommended by her counsel and accountant were part of a fraudulent scheme. Id. Threshold condition 4 states that, “no assets were transferred between the spouses as part of a fraudulent scheme.” Id. The court disagreed with respondent’s argument, stating it could not find any evidence of intent to hide the transfers, nor were there any other indicia of fraud. Id. Thus, the court determined that petitioner satisfied the threshold requirements. Id.

Ultimately, the court denied relief under I.R.C. section 6015 due to petitioner’s constructive knowledge of the contents of the joint returns that she signed. Id. at 22. The court reasoned that section 6015 does not protect a spouse who turns a blind eye to the facts readily available to her. Id. Petitioner’s arguments concerning her lack of understanding of partnerships and the tax consequences did not shield her from responsibility for the amounts shown on the returns. Id. at 23. Whatever the reasons for the tax liabilities, they were reported on the joint returns. She cannot obtain relief from liability by refusing to look at their joint returns, the numbers were on the document. Id. She had control over the partnerships in question from 2003 to 2015, and did not use any of the money from the bank accounts that she controlled to pay any of the taxes owed, which had funds from the partnerships. Id. She failed to make payments with the full knowledge that her husband was in no condition to do so, due to his physical health. Id. Thus, petitioner was denied relief under section 4.03, primarily due to her knowledge that her husband would not and could not pay the reported tax liabilities.

D.  Pullins v. Commissioner, 136 T.C. 432 (2011)

           In Pullins v. Commissioner, a husband and wife (“Mrs. Pullins”) jointly filed their tax returns over a number of years. Pullins v. Commissioner, 136 T.C. 432, 433 (2011). Mrs. Pullins, petitioned for innocent spouse relief under section 6015. Id. However, the IRS denied her request because she did not request relief within two years of the IRS’s first collection activity against her. Id. Later, upon reevaluation, the IRS determined that she was not entitled to relief under section 6015. However, the Tax Court ruled in favor of Mrs. Pullins, holding that she was in-fact entitled to relief under section 6015. Id.

           During the course of the marriage, her husband controlled all of the finances. Id. He made all the major family decisions, and decided when bills would be paid. Id. When the returns were filed, she signed them, but she did not review the returns, nor did she question her husband about any of the items on the returns. Id. at 434. Specifically, she had no knowledge that her husband omitted $10,374 of income in 1999 that was reported on a Form 1099-MISC, and the returns were not filed under duress. Id. Nearly, three years later the IRS discovered the missing income and assessed $3,430 of tax on the missing income. Id. In 2000, the couple and the IRS agreed to an installment payment to pay the 1999 tax liability. Id. at 435. However, the couple defaulted on the agreement, and as a result the IRS terminated the agreement. Id.

           Next, the IRS sent notices of intent to levy the couple for the 1999 tax year. Id. The IRS also sent notices of levy to the couple after Mrs. Pullins filed for divorce in 2005, for the 2002 and 2003 tax years. Id. The couple separated in 2004, after they filed their 2002 and 2003 returns. Id. In 2008, “Mrs. Pullins filed a Form 8857, Request for Innocent Spouse Relief, with the IRS to request relief under section 6015.” Id. at 436. This request was submitted roughly 4.5 years after the IRS issued the 2003 levy notice for the 1999 tax year, and just over three years after the 2005 levy notice for tax years 2002 and 2003. Id. 437

           Under section 6013(d)(3), when taxpayers file a joint return, each spouse is liable for the entire joint tax liability. Id. Taxpayers may be relieved of that liability under section 6015, which provides three types of relief: “(1) full or apportioned relief under section 6015(b); (2) proportionate relief for divorced or separated taxpayers under section 6015(c); and (3) equitable relief under section 6015(f) when relief is unavailable under either section 6015(b) or (c).” Id. Mrs. Pullins was not eligible to relief under subsection (b) or (c) because she exceeded the two-year time limit to request relief. Id. Congress did not impose a time limit on subsection (f) but the IRS did. Id.

           Equitable relief under subsection (f) is permitted under procedures prescribed by the Secretary, if under the circumstances it would be inequitable to hold the individual liable for any of the unpaid tax, and relief is not available under subsections (b) or (c). Id. at 438. The burden is on the taxpayer to show that it is inequitable to hold them liable under consideration of all the facts and circumstances. Id. The Court stated that Congress has provided the court with express authority to review the IRS’s denial of equitable relief under section 6015(f), which allows the court to determine what relief the taxpayer should be given under this section. Id.

           When a court takes up the matter under subsection (f), the court will conduct trial de novo, which allows the court to consider evidence outside the administrative record. Id. As mentioned in subsection (f), “procedures prescribed by the Secretary,” the IRS has issued revenue procedures to direct employees in determining whether a taxpayer is entitled to relief from joint and several liability. Id. Revenue Procedure 2003-61 list factors that the IRS employees should consider, and the Court consults those factors when reviewing the IRS’s denial of relief. Id. at 439.

           The court refers to Revenue Procedure 2003-61; however, it has been superseded by Rev. Proc. 2013-34. Rev. Proc. 2013-34. The court continues referencing Rev. Proc. 2003-61, which “provides a three-step analysis for IRS personnel to follow in evaluating requests for relief: Section 4.01 lists seven threshold conditions that must be met before the IRS will grant any relief; section 4.02 lists the circumstances in which the IRS will ordinarily grant streamlined relief for liabilities that were reported on a return (the underpayments at issue in this case); and section 4.03 sets out seven non-exclusive factors that the IRS will consider in determining whether equitable relief should be granted.” Id. The major change with the largest impact under Rev. Proc. 2013-34, is that the 2-year relief request bar has been removed. Id. “If the requesting spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made on or before the Collection Statute Expiration Date (CSED).” 2013 IRB LEXIS 478 (I.R.S. September 16, 2013). The CSED is the date the period of limitation on collection of the income tax liability expires, as provided in section 6502, which expires 10 years after the assessment of tax, but it may be extended by other provisions of the Internal Revenue Code.” Id. at 14.

           The IRS admitted that Mrs. Pullins satisfied all of the requirements except for the two-year limitation and a partial tax that Mrs. Pullins owed in her 2002 under withholding of $719. Pullins v. Commissioner, 136 T.C. 432, 433 (2011). The court stated that Mrs. Pullins should have to pay her tax obligation separately from the join filing status. Id. The purpose of section 6015 is to grant relief from joint liability. Id. The court reasoned that if they found her to be entitled to 6015 relief, under the IRS method, she would still be jointly liable for the tax. Id. In order to afford proper relief under section 6015 as intended, it is more proper here to separate her tax liability, rather than an allocation of the joint liability. Id. And as for the two-year limitation “discussing the old standard,” the court rejected it because it was held invalid under the Chevron standard. Id. “In Lantz we held the two-year deadline invalid under the Chevron standard, and consequently we follow Lantz (and Mayo and Chevron) today.” Id. at 442. Thus, she met all seven factors because the two-year limitation was rejected, and her tax liability should have been separated from her husbands.

           Next, the court looked to section 4.02 for circumstances ordinarily allowing streamlined relief. Revenue Procedure 2003-61 provides three conditions that qualify a requesting spouse for relief by the IRS from liability for an underpayment of a properly reported liability. Id. The conditions are: (1) on the date of request for relief, the requesting spouse is no longer married to, or is legally separated [under state law], or has not been a member of the same household as the non-requesting spouse at any time during the 12-month period ending on the date of the request for relief, (2) the spouse had no knowledge or reason to know that the non-requesting spouse would not pay the tax, and (3) the requesting spouse will suffer economic hardship if the Service does not grant relief. Id. It was determined that Mrs. Pullins only clearly met the first condition. Id. Note, 4.02 has not meaningfully changed under Rev. Proc. 2013-34.

1. Knowledge of the understatement or deficiency

Mrs. Pullins attempted to argue that she had no knowledge, she only signed the returns without reviewing them because she trusted her husband. Id. at 443. The court rejected her argument stating, that a taxpayer who signs a return without reading it, is nevertheless charged with constructive knowledge of the return’s contents. Id. at 444. The court imputed knowledge to the taxpayer of what she could have gleaned from the returns she signed, if she had properly reviewed them. Id. Thus, the court held that Mrs. Pullins was charged with the knowledge of the liabilities that were reported on the returns she signed. Id.

Under Rev. Proc. 2013-34, if a spouse did not know and had no reason to know of the item giving rise to an understatement, this factor will weigh in favor of relief. 2013 IRB LEXIS 478 (I.R.S. September 16, 2013). However, if the spouse did have actual knowledge of the item giving rise to the understatement, this factor will not be weighed more heavily than any other factor. Id. at 26. Furthermore, if the spouse was abused by the non-requesting spouse or they maintained control of the household finances by restricting the requesting spouse’s access to financial information, and because of this abuse or control, the requesting spouse was unable to challenge the return, this factor will weigh in favor of relief, even if the requesting spouse had actual knowledge or reason to know. Id. at 27.

2. Reason to know

In determining whether a taxpayer knew or had reason to know the non-requesting spouse would not pay the tax liability, the IRS considers the level of education attained by the requesting spouse, any deceit, level of financial involvement of non-requesting spouse, business expertise, and any lavish or unusual expenditures compared to past spending. 136 T.C. 432, 444 (2011). Mrs. Pullins has only completed high school and does not claim to have financial or business expertise. Id. at 445. And there was no evidence of lavish spending, finances were so tight that Mrs. Pullins had to go to work. Id. 444. She claimed that she never had a reason to question her husband regarding the payment of taxes. However, the court determined that when she signed the returns she did not reasonably believe that her husband would promptly pay the liabilities shown on the returns. Id. at 445. The court based this reasoning on their financial difficulties, and the partial payment of the 1999 installment agreement, of which she was fully aware. Id.

3. Economic hardship

The IRS considers a requesting spouse’s claim of economic hardship by considering all relevant information offered by the individual, such as income, assets, liabilities, age, ability to earn, and other factors. Id. at 446. Mrs. Pullins is disabled, and her disability payments will be insufficient to cover her expenses when she moves out. Id. The court noted that a hypothetical hardship is insufficient to justify relief, the hardship must be present. Id. While living with her husband, their household has a monthly budget surplus and some ability to pay the debt, which means there is no. Id. 447.

“Where, as here, the requesting spouse satisfies the threshold conditions of Revenue Procedure 2003-61, section 4.01, but fails to qualify for relief under section 4.02, she may nevertheless obtain relief under the facts and circumstances test of section 4.03.” Id. at 448. Revenue Procedure 2013-34 updated the economic factor to either weigh in favor of relief or be neutral, this factor no longer weighs against relief. 2013 IRB LEXIS 478 (I.R.S. September 16, 2013). Additionally, the factor was given clearer guidelines for what is considered economic hardship. This factor will weigh in favor of relief if the requesting spouse's income is below 250% of the Federal poverty guidelines, or if the requesting spouse’s monthly income only exceeds living expenses by $300 or less. Id. at 25.  If either situation applies to the requesting spouse, this factor will weigh in favor of relief. Id. The IRS will consider all facts and circumstances in determining whether the requesting spouse would suffer economic hardship if relief is not granted. Id. at 26.

Under 4.03, the IRS considers a nonexclusive list of factors and circumstances, to determine whether it is inequitable to hold the requesting spouse liable. 136 T.C. 432, 448 (2011). The court looked at the following; marital status, economic hardship, knowledge, non-requesting spouse’s legal obligation, significant benefit from nonpayment, good faith compliance, abuse, and mental or physical health. Id. at 448-54.  In determining whether it is inequitable to hold the taxpayer liable for a joint tax liability, no single factor is determinative. Id.

The court concluded that three factors favored retained liability and four factors favored relief. Id. at 454. Her failure to prove economic hardship, lack of a reasonable expectation that her husband would pay the liabilities when she signed the returns, and her failure to timely file or pay her taxes since the years in issue, all weighed against her. Id.  However, her divorce, lack of significant benefit from nonpayment, her poor health, and lack of knowledge of her husband’s unreported income, all weigh in her favor. Id. And, “especially weighty here is the fact that the divorce court—with the family's circumstances set out before it in greater detail than was possible in our tax case—determined that her husband should pay the taxes, placed proceeds in his hands sufficient to do so, and allocated resources to Mrs. Pullins on the assumption that he would do so and she would not have to.” Id. at 454-55. Therefore, the court determined that it would be inequitable to hold Mrs. Pullins jointly liable for the couple’s previous returns.

E.   Hudgins v. Commissioner, T.C. Memo 2012-260

           In Hudgins v. Commissioner, the court held that the taxpayer was not entitled to relief under section 6015(f) because the taxpayer took affirmative steps to minimize her asset ownership in order to distort the economic analysis conducted with respect to her section 6015(f) request. Hudgins v. Commissioner, T.C. Memo 2012-260. The court considered all relevant factors under Rev. Proc. 2003-61. Id. at P15.

Ultimately, the court determined that she did not satisfy the safe harbor requirements of section 4.02 because she failed to satisfy her burden of showing that she reasonably believed that the tax due on the 2007 return would be paid, and that she would suffer economic hardship if denied. Id. at P32. Thus, her relief was not streamlined under 4.02. However, if a requesting spouse that satisfies the threshold conditions of section 4.01, but fails to satisfy one or more of the safe harbor requirements of section 4.02, the Commissioner may still grant equitable relief under section 4.03, on the basis of balancing the seven enumerated factors. Importantly, the list of enumerated factors under 4.03 are not exhaustive, and no single factor is determinative. Rev. Proc. 2013-34.

In summary, two of the factors set out under section 4.03, favor granting relief, four factors were neutral, and two factors weighed against granting relief. Petitioner had the burden of proof as to persuasion, and if this were a matter of simply counting factors for and against relief, she would lose. Id. at P39. The court evaluates all of the relevant facts and circumstances to reach a conclusion. The most compelling facts in the court’s analysis, were the findings that petitioner fraudulently conveyed properties and failed to disclose her interest in the Lincoln County property. Id. at P40. These weigh heavily against relief in our view because a spouse requesting equitable relief under section 6015(f) should come to the table with -clean hands-. Id. Petitioner took affirmative steps to minimize her asset ownership in order to distort the economic analysis conducted with respect to her section 6015(f) request for relief. The court concluded that petitioner was not entitled to relief from joint and several liability.

F.   Sutherland v. Commissioner, T.C. Memo 2021-110

In Sutherland v. Commissioner, the taxpayer was denied innocent spouse relief under section 6015(f) for unpaid employee payroll taxes for her husband’s company. Sutherland v. Commissioner, 2021-110. Mrs. Sutherland was denied relief because she failed to show economic hardship from the tax liabilities, she benefited from the nonpayment, and she knew that the payroll taxes were not paid. Id. Mrs. Sutherland worked at her husband’s company as a bookkeeper because her husband did not use computers. Id. at 4. As a bookkeeper, she would input business and payroll data into the computer. Id.

In 2005, the IRS discovered that the company failed to file employment tax for tax returns in years 2003 and 2004. Id. The IRS discovered that Mr. Sutherland withheld the payroll taxes from his employee’s paychecks but did not pay those taxes to the IRS. Id. In a criminal investigation, it was determined that the payroll tax money was used by Mr. and Mrs. Sutherland for vacations, mortgage payments, and private school tuition for their daughter. Id. At trial, Mrs. Sutherland admitted that she knew the business account was sometimes used for personal expenditures. Id. Mr. Sutherland was criminally convicted in 2011, and his attorney informed her that the taxes would have to be paid back. Id. at 6.

She signed the 2005 and 2006 returns -after- being informed that the taxes would have to be paid back. Id. However, at trial she testified that she believed it was her husband’s obligation to pay the taxes back because it was his company. Id. In 2016, Mrs. Southerland filed a Form 8857 to request innocent spouse relief, on that form she claimed that the 2005 and 2006 returns were prepared by her husband’s accountant with no input from her. Id. at 7. She also claimed that she signed the returns during a confusing and emotional period; however, she failed the check the box on the form 8857 to indicate that she had mental or physical health problems. Id.

The court looked to the seven threshold conditions for relief under section 4.01 of the Rev. Proc. 2013-43, to determine whether she qualified for relief. Id. at 10. The court determined that she did not qualify for 4.02 streamlined relief because she was still married. Id. However, Mrs. Sutherland could still qualify for relief under section 4.02, if she met the seven factors listed there. Id. Under section 4.02, the court noted that no one factor is determinative, relief may be denied even where a majority of factors favor relief, and the court is not strictly bound by the seven factors. Id. at 11. The court assessed the following seven factors:

1.    Marital status

At the time of trial, Mrs. Sutherland was married to Mr. Sutherland (“the non-requesting spouse”) and had been married to him at all relevant times. Id. The court counted this factor as neutral because the marital factor cannot count negatively against the taxpayer, only positive or neutral under Rev. Proc. 2013-43. Id. 

2.    Economic hardship

The court stated that an economic hardship exists if payment of the tax in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses. Id. However, Mrs. Sutherland received a substantial distribution from her mother’s estate, and as a result, the tax liabilities (“totaling about $40,000”) were significantly less than her inheritance. Id. at 11-12. As a result, she did not contend that the payments of the tax would cause her economic hardship. Thus, the court determined this factor to be neutral. Id. at 12.

3.    Significant benefit

"A significant benefit is any benefit in excess of normal support . . . if the requesting spouse enjoyed the benefits of a lavish lifestyle . . . this factor will weigh against relief . . ..” Id. In contrast, if the requesting spouse had virtually no benefit from the underpayment of tax, this factor will weigh in favor of relief. Id. In Mrs. Sutherland’s case, the court determined that there was no evidence that she enjoyed a lavish lifestyle; however, the parties agreed that Mrs. Sutherland and her husband shared the benefits of not paying their tax liabilities. Id. It was determined that this factor was neutral. Id.

4.    Subsequent compliance

This factor was neutral because she remained married to Mr. Sutherland and continued to file joint returns with him after requesting relief. Id.  

5.    Legal obligation

If the non-requesting spouse has the legal obligation to pay an outstanding Federal tax liability, this factor will favor relief for the requesting spouse. Id. at 13. "[A] legal obligation is an obligation arising from a divorce decree or other legally binding agreement.” Id. The factor will be neutral if the spouses are separated, or there no binding agreement. Id. The court determined that the factor was neutral for Mrs. Southerland because the couple have remained married and there was no binding agreement. Id. Mrs. Sutherland argued that there was a binding agreement because of her husband’s criminal plea agreement, which required him to pay the tax. Id. However, Mr. Southerland’s plea to repay the tax does not relieve her from her obligation to pay the taxes, for which she was joint and severally liable. Id. Furthermore, she was not a party to the plea agreement, and that document neither imposed, nor relieved her of any liability to pay the taxes. Id.

6.    Knowledge or reason to know

In a case involving underpayment, tax relief is favored if the requesting spouse reasonably expected the non-requesting spouse to pay the tax liability. However, this factor will weigh against relief if it was unreasonable for the requesting spouse to believe that the non-requesting spouse would or could pay the tax. Id. at 14.

The court determined that Mrs. Southerland knew or should have known, when signing the 2005 and 2006 returns in 2011, that her husband would not or could not pay the tax liability at that time or within a reasonable period of time after filing the return. Id. at 16. She was intimately familiar with her husband’s business and its finances. Id. The restitution remainder remained unpaid as of 2016, five years after sentencing. Id. Furthermore, on cross examination, she admitted that if her husband were imprisoned, he would not have been able to pay any tax payments until after his release. Id. She relies on the presumption that the tax will be paid if the couple submits a request for an installment agreement; however, no such request was ever submitted. Id. at 17. It is not sufficient that the couple represent that the tax will be paid at some future time. Id. The request must be filed, and it must detail the plan for paying the tax within a reasonable time. Id. Mrs. Sutherland has failed to provide any evidence of the installment agreement or other plan for their 2005 or 2006 tax liabilities. Id.

Lastly, the petitioner argues that she could not possess actual knowledge that the liability would not be paid, nor did she have actual knowledge of the liability. Id. The court rejected this argument and charged Mrs. Sutherland with constructive knowledge of the contents of the 2005 and 2006 returns. Id. “Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her.” Id. And Mrs. Southerland has not shown that she faces abuse, nor a lack of access to household finances. Id. Thus, the court concluded that the reason to know factor weighs against relief for Mrs. Sutherland. Id. at 18.

7.    Mental or physical health

“This factor may favor relief if the requesting spouse was in poor physical or mental health when the tax returns were filed or when the request for relief was made.” Id. If a requesting spouse was not in poor mental health, this factor is neutral. Id. Mrs. Sutherland says she suffered from health issues but failed to indicate this on Form 8857 when requesting innocent spouse relief. Id. Furthermore, there is no evidence showing that she discussed her health conditions with any medical professional, and her husband even admitted, that despite her stress, “she didn’t have something medically go wrong.” Id. at 19. The question is not whether the requesting spouse has an alleged health condition but whether that condition impacted their ability to meet Federal tax obligations. Id.

No evidence was provided to show that Mrs. Sutherland’s stress affected her ability to pay the 2005 and 2006 tax liabilities. Id. at 20. The court stated that she knew that she was jointly liable for the tax, she neglected to pay not because of health, but because she hoped her husband would pay. Id. Thus, the court determined this factor to be neutral.

8.    Additional facts and circumstances

As discussed in Rev. Proc. 2013-34, a court is not limited to the seven factors, other factors relevant to a specific claim for relief may also be considered. Id. The court considered two additional factors, which weighed against relief. Id. First, when signing the returns, Mrs. Sutherland knew that she would receive a large inheritance from her mother’s estate. Id.  Second, she represented on Form 8857 that, “my husband kept the finances to himself, that she had no personal knowledge of our circumstances, and that she at all times was a homemaker.” Id. at 21. The court held that these statements were untrue or misleading at best because she was intimately involved in the business. Id. She was the book keeper of the company, which means she was particularly familiar with the company’s finances. Id. Her dishonest statements under factor eight cut decisively against granting equitable relief. Id.  There were no factors weighing in favor of relief, weighing the seven factors “and the two additional factors,” the court determined that Mrs. Sutherland failed to carry her burden of proving that she was entitled to relief. Id. at 22. Thus, she was not entitled to relief under section 6015(f).

G.  Robinson v. Commissioner, T.C. Memo 2020-134

The Robinson’s were married in 1998 and divorced in 2014. Robinson v. Commissioner, T.C. Memo 2020-134. Mrs. Robinson was granted relief under 6015(f) because of her marital status, knowledge, and lack of significant benefit. Id. The couple had an unpaid tax liability from 2010, which Mr. Robinson agreed to assume pursuant to a 2014 divorce agreement. Id. at 13. Mr. Robinson failed to pay the tax liability because his accountant told him that Mrs. Robinson sill had joint liability for the tax. Id. Mrs. Robinson filed a form 8857 in 2015, requesting relief from the 2010 tax liability. Id. at 14.

In 2016, The IRS denied her request for relief under section 6015(f) for tax year 2010. Id. The IRS denied her request because she failed threshold factor seven, which requires that the income tax liability from which the requesting spouse seeks relied to be attributable, either in full or in part, to an underpayment resulting from the non-requesting spouse’s income. id. at 20. The court determined that she was not involved in the business during 2010 based on the fact that her husband moved out of the marital home, and the financial statements no longer had her name on them, as they had in the past. Id. at 21. Thus, the court determined that she met all seven threshold requirements, and was entitled to move on to determine whether she meets the criteria for streamlined relief under 4.02, or equitable relief under 4.03.

Mrs. Robinson conceded that she would not suffer economic hardship if relief were not granted; thus, the court moved to section 4.03. Id. at 24. She met factor one because she was divorced from Mr. Robinson. Id. at 26. When assessing whether she had knowledge or reason to know whether the non-requesting spouse would or could not pay the tax liability, the court looked at several factors from Rev. Proc 2013-34; “(1) the requesting spouse's level of education; (2) any deceit or evasiveness of the non-requesting spouse; (3) the requesting spouse's degree of involvement in the activity generating the tax liability or the household or business finances; (4) the requesting spouse's business or financial expertise; and (5) the presence of lavish or unusual expenditures relative to the past spending levels.” Id. at 27. The operative date in determining whether the requesting party knew or had reason to know is on the date the return is signed. Id.

Knowledge or reason to know

The court stated that a taxpayer is usually charged with constructive knowledge of a tax returns content when they sign it. Id. However, the knowledge is negated when a non-requesting spouse has restricted financial access to financial information, as to prevent the requesting spouse from questioning the return. Id. at 28. Mrs. Robinson was not involved in the business in 2010, she was not involved in preparing the return, and her husband controlled the business account. Id. She was listed on the account but she did not write checks. Id. Mr. Robinson did not provide any banking or business financial records. Id. And he admitted that he received cash from the business that he did not report. Id. Lastly, she received an allowance from Mr. Robinson for household needs, and she was not permitted to touch any of the other funds. Id at 29. The court concluded that her constructive knowledge was negated by Mr. Robinson's restrictive financial control. Id.

Furthermore, even if she were charged with constructive knowledge, the court stated that she did not have a reason to know that Mr. Robinson was unable to pay the 2010 tax. Id. Mrs. Robinson is a high school graduate with no financial expertise. Id. at 30. And she was no longer involved in the business in 2010. Id. Her constructive knowledge of the return includes the net profits of $171,724, which would have given no indication that her husband would be unable to pay the tax. Id. At the time of signing the return, there is no evidence of lavish spending, and the couple’s communication had broken down due to separation. Id. Thus, the court concluded that this factor favored relief.

Legal obligation

           At the time of entering into the divorce settlement agreement, she had reason to know that Mr. Robinson might not pay the 2010 tax liability that he agreed to pay. Id. at 33. She was aware that he had bad credit, had failed to pay the tax over the past three years, and that he failed to pay the IRS installment agreement. Id. at 32. Thus, this factor is neutral, despite Mr. Robinson’s legal obligation to pay the entire 2010 tax liability. Id at 33.

Significant benefit

           This factor weighs against relief if the requesting spouse significantly benefited in excess of the normal support from the unpaid tax liability. Id. The court stated that evidence of the lack of a significant benefit favors relief for the requesting party. Id. However, Mr. Robinson did benefit from nonpayment, he used the money for his business, did not pay alimony in exchange for the 2010 tax assumption. Id. at 34. Thus, this factor favors relief.

Compliance with Federal income tax laws

           If the requesting spouse complied with Federal income tax laws for taxable years after being divorced from the non-requesting spouse, this factor favors relief. Id. at 35. If the requesting spouse has made a good faith effort to comply in the tax years following the year for which relief is sought, then this factor is neutral. Id. Mrs. Robinson failed to comply with Federal income tax law after the 2010 tax issue. Id. In 2014, she intentionally failed to timely filed her 2014 return and therefore did not make a good faith effort to comply. Id. Thus, this factor weighs against relief.

           In conclusion, the court determined based upon all of the facts and circumstances, that equities weigh in favor of relief. Id. at 37. Factors favoring relief were marital status, knowledge, and lack of a significant benefit. Id. And the factors weighing against relief were her noncompliance with Federal income tax laws. Id. The remaining factors were considered neutral. Id. Importantly, the court noted, that its decision was not based on a factor tally, the court carefully weighed the facts and circumstances of the particular case. Id.

VI. Analysis

I.R.C section 6015 provides Mr. Smith with the opportunity for relief because he filed a joint return with his spouse for the tax year in question. In order to attain relief; first, Mr. Smith will need to file a Form 8857 to request innocent spouse relief under I.R.C. section 6015. Mr. Smith Petitioner has the burden of proof as to persuasion, which means he will need to show that he satisfies the requirements under Rev. Proc. 203-34. He will not be afforded relief under I.R.C. section 6015 (b) or (c) because more than two years have passed since the Secretary initiated collection activities. However, Mr. Smith still has the ability to request relief under I.R.C 6015(f) because it is not limited to two years. Prior to the Rev. Proc 2013-34 update, courts were split on whether the two-year limitation applied to subsection (f). Under the Rev. Proc. 2013-34 update, it was clarified that a request for relief needed to be filed prior to 10 years after the assessment of tax, and even that limitation may be extended by other provisions in the code. In Mr. Smith’s situation, 10 years have not passed since the assessment of tax, which means he qualifies for relief under subsection (f).

Now it must be determined whether Mr. Smith satisfies the requirements under Rev. Proc. 2013-34. He must meet the seven threshold requirements set out under section 4.01 of Rev. Proc. 2013-34. If he meets the requirements under 4.01 and 4.02 he will qualify for a streamlined relief request. Alternatively, if he meets the threshold requirements under 4.01 but does not meet the requirements under 4.02, he may still qualify under 4.03. In order to meet the requirements under 4.03, Mr. Smith will have to show that in a balancing of the seven enumerated factors, it would be inequitable to hold him liable for any unpaid tax.

Rev. Proc. 2013-34 Section 4.01 Threshold Requirements

1. The requesting spouse filed a joint return for the taxable year for which relief is sought.

           Here, Mr. Smith filed a joint return with his wife in 2016, this is not in dispute. Thus, this factor will not prevent relief.

2. Relief is not available to the requesting spouse under section 6015(b) or (c).

           As mentioned supra, Mr. Smith is not eligible for relief under subsections (b) or (c) because more than two years have passed since the Secretary has begun collection activities, which bars relief under I.R.C. section 6015 (b) or (c). Looking to the rule, I.R.C. section 6015(b)(1)(E) explicitly states that there is a two-year limitation for filing for relief under subsection (b). Additionally, subsection (c) has the same two-year limitation. I.R.C. 6015(c)(3)(B). Thus, this factor will not bar relief under subsection (f).

3. The claim for relief is timely filed.

           As discussed, Rev. Proc. 2013-34 has clarified that the two-year time bar for relief request does not apply to subsection (f). The request for relief needs to be filed prior to 10 years after the assessment of tax, which is not an issue here, as ten years have not passed. Thus, Mr. Smith meets threshold requirement three.

4. No assets were transferred between the spouses as part of a fraudulent scheme.

Here, unlike in Welwood v. Commissioner, there was no property transferred between Mr. Smith and his spouse. In Welwood v. Commissioner, the moving of property between spouses looked to the service as an attempt to have a fraudulent scheme, that is a nonissue here. Thus, this  factor has been satisfied.

5. The non-requesting spouse did not transfer disqualified assets to the requesting spouse.

           Just as mentioned in factor four, there have been no property transfers between Mr. Smith and Brandy, which means no disqualified assets have been transferred. Thus, this factor has also been satisfied.

6. The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.

In Welwood v. Commissioner, the court focused on factor four, stating that it could not find any evidence of intent to hide the transfers, nor were there any other indicia of fraud. The same line of logic applies to Mr. Smith’s facts for factors four through six, because there is no evidence or indicia of fraud attributable to Mr. Smith. He has openly admitted to mistakenly writing $60,000 for his business deductions versus $600, this was clearly a clerical error with no intent to defraud or evade tax. Furthermore, he would not be requesting relief for this portion of the tax to begin with. Thus, Mr. Smith satisfies factor six because there is no indication of fraud.

7. Absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the non-requesting spouse.

           Mr. Smith may only request relief from the portion of the tax attributable to his spouse, not from his clerical mistake, as mentioned supra. Thus, he has satisfied this final threshold factor, which means Mr. Smith satisfies all seven threshold factors under 4.01. Next it must be determined whether he satisfies the factors under 4.02 or 4.03, and if so he will qualify for relief under I.R.C. section 6015(f).

Rev. Proc. 2013-34 Section 4.02 Streamlined Relief  

1. On the date of the request for relief, the requesting spouse is no longer married to, or is legally separated from the non-requesting spouse under state law.

           Under Colorado law one of the spouses are required to petition the court for a declaration of dissolution or legal separation. Currently, Mr. Smith is still married to Brandy, and there is no indication that either of them have filed for legal separation or dissolution of the marriage. In-fact, Mr. Smith has indicated that he is still in love with her and he’s just waiting on her affair to be over with. Under the streamlined test, all three factors must be met, and given that factor one fails, Mr. Smith will not be entitled to a streamlined request under 4.02. Next, it must be determined whether Mr. Smith qualifies for relief under 4.03, and if not, he will not qualify for relief under section 6015(f).

Rev. Proc. 2013-34 Section 4.03 Factors

1. Marital status

Just as in Sutherland v. Commissioner, Mrs. Sutherland was still married to Mr. Sutherland (“the non-requesting spouse”) and had been married to him at all relevant times. The court counted this factor as neutral because the marital factor cannot count negatively against the taxpayer, only positive or neutral under Rev. Proc. 2013-43. Presently, the Mr. Smith and Brandy are still legally together and married, even if they have been apart for a few weeks. Therefore, this factor is neutral for Mr. Smith.

2. Economic hardship

In Sutherland v. Commissioner, the court stated that an economic hardship exists if payment of the tax in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses. Id. Mrs. Sutherland did not meet this factor because she received a substantial distribution from her mother’s estate, and as a result, the tax liabilities (“totaling about $40,000”) were significantly less than her inheritance. Unlike Mrs. Sutherland, Mr. Smith has not received a large inheritance that substantially outweighs the tax liability but it is close. The tax liability is in excess of $100,00 and his inherited stock is valued at $75,000. Additionally, the economic hardship factor will weigh in favor of relief if the requesting spouse's income is below 250% of the Federal poverty guidelines, or if the requesting spouse’s monthly income only exceeds living expenses by $300, neither of which have been indicated in Mr. Smith’s case.

In Pullins v. Commissioner, the court mentioned that IRS considers a requesting spouse’s claim of economic hardship by considering all relevant information offered by the individual, such as income, assets, liabilities, age, ability to earn, and other factors. Mrs. Pullins was disabled, and her disability payments were insufficient to cover her expenses if she moved out. However, the court determined that a hypothetical hardship is insufficient to justify relief, the hardship must be present. While she was living with her husband, their household had a monthly budget surplus and some ability to pay the debt.

Unlike Mrs. Pullins, Mr. Smith not indicated that he has a disability, nor has he gone into any depth of financial difficulties. As mentioned in Pullins, Smith has no difficulty paying his expenses while living in the marital home, which means he has not shown that he will face a present economic hardship if he is made to pay the tax. Furthermore, the inherited stock along with the allowance Brandy provides him with of $900 seems to be more than enough to cover his expenses. Brandy also pays all the bills for both her LLC and Mr. Smith’s, and their house is paid for. In totality, Mr. Smith has not shown that he will face economic hardship if he is made to pay the tax. Thus, this factor is neutral for Mr. Smith because Rev. Proc. 2013-34 states that this factor will not weigh against relief.

3. Significant benefit

In Sutherland v. Commissioner, the court stated that a significant benefit is any benefit in excess of normal support, if the requesting spouse enjoyed the benefits of a lavish lifestyle, this factor will weigh against relief. However, if the requesting spouse had virtually no benefit from the underpayment of tax, this factor will weigh in favor of relief. For Mrs. Sutherland, court determined that there was no evidence that she enjoyed a lavish lifestyle; however, the parties agreed that Mrs. Sutherland and her husband shared the benefits of not paying their tax liabilities. The court determined that this factor was neutral for Mrs. Sutherland. Like Mrs. Sutherland, Mr. Smith did not enjoy the benefits of a lavish lifestyle due to the underpayment of the tax. And looking to the years before and after the underpayment, there is no evidence that Mr. Smith’s life changed in any meaningful way. However, it could be argued that the couple benefited from the nonpayment of the $100,000 tax liability.

Looking to Robinson v. Commissioner, the court stated that this factor weighs against relief if the requesting spouse significantly benefited in excess of the normal support from the unpaid tax liability. On the other hand, the court stated that evidence of the lack of a significant benefit favors relief for the requesting party. Here, Mr. Smith has not significantly benefited from the nonpayment of the tax. He has lived in the same house, and gone on the same amount of vacations that he did before. Furthermore, it has not been shown that he lives lavishly due to the nonpayment. Thus, this factor likely favors relief.

4. Subsequent compliance

In Sutherland v. Commissioner, this factor was neutral because Mrs. Sutherland remained married to Mr. Sutherland and continued to file joint returns with him after requesting relief. Id. Here, Mr. Smith timely filed a married filing separately tax return for 2019 but made no estimated tax payments and owes the IRS $2,256 for 2019. He has yet to make any estimated tax payments for 2020, which means that his 2020 return is late. Unlike the Sutherland’s Mr. Smith is not showing that he subsequently complied with Federal income tax laws because he is late on his payments for 2019, and he has failed to timely file his 2020 return.

           In Robinson v. Commissioner, the court stated that if the requesting spouse has made a good faith effort to comply in the tax years following the year for which relief is sought, then this factor is neutral. However, Mrs. Robinson failed to comply with Federal income tax law after the 2010 tax issue. In 2014, she intentionally failed to timely file her 2014 return and therefore did not make a good faith effort to comply. Thus, this factor weighed against relief. As in Mrs. Robinson’s case, Mr. Smith has also failed to make a good faith effort to comply in the tax years following the year for which relief is sought. Mr. Smith’s failure to make a good faith effort at compliance with Federal tax law causes this factor to weigh against relief.

5. Legal obligation

In Robinson v. Commissioner, the time of legal obligation was counted from the time of the couple entered into the divorce settlement agreement. At the time of entering into the divorce settlement agreement, Mrs. Robinson had reason to know that Mr. Robinson might not pay the 2010 tax liability that he agreed to pay. She was aware that he had bad credit, had failed to pay the tax over the past three years, and that he failed to pay the IRS installment agreement. Thus, this factor was neutral, despite Mr. Robinson’s legal obligation to pay the entire 2010 tax liability.

In Sutherland v. Commissioner, the court stated that if the non-requesting spouse has the legal obligation to pay an outstanding Federal tax liability, this factor will favor relief for the requesting spouse. However, the factor will be neutral if the spouses are separated, or there is no binding agreement. In Mr. Smith’s case, there is no agreement like in the Robinson case. Mr. Smith’s case is more similar to Mrs. Sutherland’s case because he remains married and there is not an agreement relating to the tax liability. Thus, it is likely that the court will find that this factor is neutral because there is no strong indication in either direction.

6. Knowledge or reason to know

As discussed in Robinson v. Commissioner, the operative date in determining whether the requesting party knew or had reason to know that the return would not or could not be paid by the non-requesting spouse is on the date the return is signed. For Mr. Smith, the operative date was in 2017, which is when the return was due and submitted. In Welwood v. Commissioner, the court denied relief under I.R.C. section 6015 due to petitioner’s constructive knowledge of the contents of the joint returns that she signed. The court reasoned that I.R.C. section 6015 does not protect a spouse who turns a blind eye to the facts readily available to her. Petitioner’s arguments concerning her lack of understanding of partnerships and the tax consequences did not shield her from responsibility for the amounts shown on the returns. The tax liabilities were reported on the joint returns, she had control over the bank accounts, and did not use any of the money from the bank accounts that she controlled to pay any of the taxes owed, which had funds from the partnerships that owed the taxes. She failed to make payments with the full knowledge that her husband was in no condition to do so, due to his physical health.

Unlike the Welwood case, Brandy does not have any illness or disability that prevents her from making the tax payment, and Mr. Smith lacks any control over Brandy’s assets. Looking next to Pullins v. Commissioner, Mrs. Pullins attempted to argue that she had no knowledge, she only signed the returns without reviewing them because she trusted her husband. However, the court imputed knowledge to the taxpayer of what she could have gleaned from the returns she signed, if she had properly reviewed them. Thus, the court held that Mrs. Pullins was charged with the knowledge of the liabilities that were reported on the returns she signed. Similarly, Mr. Smith signed the return, which means the knowledge of the things in the return could be imputed to him.

Under Rev. Proc. 2013-34, if a spouse did not know and had no reason to know of the item giving rise to an understatement, this factor will weigh in favor or relief. If the spouse had actual knowledge of the item giving rise to the understatement will not be weighed more heavily than any other factor. Furthermore, if the spouse was abused by the non-requesting spouse or they maintained control of the household finances by restricting the requesting spouse’s access to financial information, and because of this abuse or control, the requesting spouse was unable to challenge the return, this factor will weigh in favor of relief, even if the requesting spouse had actual knowledge or reason to know. Mr. Smith will likely qualify for this defense because Brandy has tight control over all of the finances.

In Robinson v. Commissioner, Mrs. Robinson’s constructive knowledge of the return was negated due to her restricted financial access to financial information, which her husband put in place to prevent her from questioning the return. Mrs. Robinson was not involved in the business in 2010, she was not involved in preparing the return, and her husband controlled the business account. Lastly, Mrs. Robinson received an allowance from Mr. Robinson for household needs, and she was not permitted to touch any of the other funds. Thus, the court concluded that her constructive knowledge was negated by Mr. Robinsons restrictive financial control. And even if she were charged with constructive knowledge, the court stated that she did not have a reason to know that Mr. Robinson was unable to pay the 2010 tax. She was a high school graduate with no financial expertise. And she was no longer involved in the business.

Mr. Smith’s situation closely mirrors Mrs. Robinson’s, he is not involved in her business Brandy’s, he did not know about the rental property or income, and Brandy pays him an allowance. He has no control over the finance and he has only taken a few classes in philosophy. In contrast, Brandy has all of the financial control, pays all the bills, gives Mr. Smith an allowance, she has a degree in Economics, and a Masters in Accounting. It could be argued that Mr. Smith had reason to know that the numbers on the return were off because he stated that the taxable return was about $160,000 less than their past few returns. However, in his defense, he signed the return in a hurry, and he’s not a numbers person. But, just as stated in Pullins and Welwood, Mr. Smith will be charged with constructive knowledge of the returns, which would include this stark tax difference. He should have noticed the difference when he signed the return. As mentioned in the Pullins case, in determining whether a taxpayer knew of had reason to know the non-requesting spouse would not pay the tax liability, the IRS considers the level of education attained by the requesting spouse, any deceit, level of financial involvement of non-requesting spouse, business expertise, and any lavish or unusual expenditures compared to past spending.

Thus, Brandy had the superior education, financial control, business expertise, and there is no evidence that couple have had any lavish or unusual spending. Mr. Smith did not know and had no reason to know that Brandy would not pay the tax obligation at the time of signing. And even if he is charged with constructive knowledge, it will be negated due to Brandy’s financial control and understanding of the couple’s finances. Therefore, this factor favors relief.

7. Mental or physical health

In Sutherland v. Commissioner, the court stated that this factor may favor relief if the requesting spouse was in poor physical or mental health when the tax returns were filed or when the request for relief was made. If a requesting spouse was not in poor mental health, this factor is neutral. In Mrs. Sutherland’s case, the court determined that there was no evidence showing that she discussed her health conditions with any medical professional, and her husband even admitted, that despite her stress, “she didn’t have something medically go wrong.” The question is not whether the requesting spouse has an alleged health condition but whether that condition impacted their ability to meet Federal tax obligations. Here, Mr. Smith has provided no evidence that he suffers from any kind of illness. Thus, this factor is neutral.

8. Additional facts and circumstances

As discussed in Rev. Proc. 2013-34, a court is not limited to the seven factors, other factors relevant to a specific claim for relief may be also considered. In Sutherland, the court considered two additional factors, which weighed against relief. First, when signing the returns, Mrs. Sutherland knew that she would receive a large inheritance from her mother’s estate. When she submitted Form 8857, she had more than $400,000 in the bank, she could have paid off the $40,000 tax liability. The court stated that it would not have been inequitable for the IRS to collect this tax from her. Second, she stated that her husband kept the finances to himself, and that she had no knowledge of their finances. The court held that she was intimately involved in the business because she was the book keeper of the company, which meant that she was particularly familiar with the company’s finances.

Like in Sutherland, Mr. Smith did have an inheritance but it is not substantially more than the tax liability. And unlike, Mrs. Sutherland, Mr. Smith is not familiar with the couple’s finances because Brandy actually controls the finances. Thus, this factor favors relief.