Innocent Spouse Relief Under IRC 6015: Protection When Your Ex Filed Wrong

Joint Liability and the Problem It Creates in Divorce

When married couples file joint tax returns, both spouses become jointly and severally liable for the entire tax, interest, and penalties associated with that return under IRC Section 6013(d)(3). This means the IRS can pursue either spouse for the full amount owed, regardless of which spouse earned the income or claimed the deductions that created the liability. For business owners and real estate investors going through divorce, this rule can produce devastating consequences. If a former spouse underreported business income, inflated deductions, or engaged in aggressive tax positions on joint returns filed during the marriage, the other spouse may face IRS collection actions years after the divorce is finalized.

IRC Section 6015, enacted as part of the IRS Restructuring and Reform Act of 1998, provides three distinct forms of relief from joint and several liability. Each type addresses different circumstances and carries its own qualification requirements, timing rules, and scope of protection. Understanding all three is essential for any business owner who signed joint returns during a marriage that has since ended, particularly when the other spouse controlled the business finances or operated enterprises whose tax reporting was opaque.

Traditional Innocent Spouse Relief Under IRC 6015(b)

The first and most straightforward form of relief is traditional innocent spouse relief under IRC Section 6015(b). This provision applies when there is an understatement of tax attributable to erroneous items of the other spouse. To qualify, the requesting spouse must demonstrate that a joint return was filed, that there is an understatement of tax attributable to erroneous items of the other spouse, that the requesting spouse did not know and had no reason to know of the understatement at the time of signing the return, and that it would be inequitable to hold the requesting spouse liable.

The "reason to know" standard is where most Section 6015(b) claims succeed or fail. The IRS and Tax Court evaluate what a reasonable person in the requesting spouse's position would have known. For a business owner married to another business owner, the bar is higher because the IRS presumes a greater level of financial sophistication. However, when one spouse controlled a separate business and the other had no involvement in its operations or bookkeeping, the requesting spouse may genuinely have lacked reason to know that Schedule C income was underreported or that fictitious expenses were deducted. The analysis considers factors such as the requesting spouse's education, business experience, involvement in the family finances, and whether the couple's lifestyle was consistent with or extravagant relative to the reported income.

Separation of Liability Under IRC 6015(c)

The second form of relief, separation of liability under IRC Section 6015(c), is specifically designed for divorced or separated spouses. This provision allows an eligible spouse to limit their liability to the portion of the understatement that is properly allocable to them. Unlike Section 6015(b), the requesting spouse does not need to prove lack of knowledge. The relief is available to any requesting spouse who is no longer married to the other spouse, is legally separated, or has not been a member of the same household as the other spouse during the 12 months preceding the election.

The allocation under Section 6015(c) follows the rules that would apply if the spouses had filed separate returns. Items of income are allocated to the spouse who earned them. Deductions are allocated to the spouse whose activity generated them. For business owners, this means that underreported S corporation income or inflated partnership deductions attributable to the other spouse's business are allocated entirely to that spouse, and the requesting spouse's liability is reduced accordingly. This form of relief is particularly powerful for a spouse who was not involved in the other spouse's business and whose own income and deductions were straightforward.

There is, however, a critical limitation. Section 6015(c)(3)(C) provides that relief is unavailable if the IRS demonstrates that the requesting spouse had "actual knowledge" of the erroneous item at the time the return was signed. Note that this is a higher standard than the "reason to know" test in Section 6015(b). The IRS must prove actual knowledge, not merely constructive knowledge. This distinction makes separation of liability an attractive option for business owners who may have had general awareness that their spouse's business was profitable but did not know the specific amounts being reported or the specific deductions being claimed.

Equitable Relief Under IRC 6015(f)

The third form of relief, equitable relief under IRC Section 6015(f), serves as a catch-all for situations where the requesting spouse does not qualify for relief under Section 6015(b) or (c) but where it would be inequitable to hold them liable. This provision applies to both understatements (items that should have been reported but were not) and underpayments (tax that was properly reported but not paid). The distinction is important because Sections 6015(b) and (c) apply only to understatements, leaving underpayment situations to the equitable relief provision.

Revenue Procedure 2013-34 sets forth the factors the IRS considers in evaluating equitable relief claims. These factors include the requesting spouse's current marital status, whether they would suffer economic hardship if relief were denied, whether they knew or had reason to know of the understatement or underpayment, whether they received a significant benefit from the unpaid taxes, whether they made a good-faith effort to comply with tax laws in subsequent years, and whether the other spouse had a legal obligation under the divorce decree to pay the tax liability. The IRS also considers whether the requesting spouse was subject to abuse or coercion by the other spouse, recognizing that financial control in a marriage can prevent one spouse from understanding or challenging tax positions taken on joint returns.

For business owners, the "significant benefit" factor warrants careful attention. The IRS looks at whether the requesting spouse enjoyed a lifestyle that was materially enhanced by the underreported income or unpaid taxes. If the couple lived modestly relative to their reported income, this factor weighs in favor of relief. If the unreported income funded luxury purchases, expensive vacations, or real estate acquisitions, the IRS may determine that the requesting spouse benefited from the noncompliance and deny equitable relief accordingly.

Filing Form 8857: Timing and Procedural Requirements

A request for innocent spouse relief is made by filing Form 8857, Request for Innocent Spouse Relief. The timing requirements differ by type of relief. For traditional relief under Section 6015(b), the request must be filed no later than two years after the date the IRS first began collection activity against the requesting spouse. For separation of liability under Section 6015(c), the same two-year deadline applies. For equitable relief under Section 6015(f), the IRS eliminated the two-year deadline effective July 25, 2011, following the Tax Court's decision in Lantz v. Commissioner. Equitable relief claims may now be filed at any time during the period the IRS can collect the tax, which is generally ten years from the date of assessment under IRC Section 6502.

Business owners who discover potential liability issues during or after divorce proceedings should file Form 8857 promptly rather than waiting for the IRS to initiate collection. Filing the form triggers important procedural protections, including the right to petition the Tax Court if the IRS denies relief, and a suspension of certain collection activities while the claim is pending. The IRS is required to notify the other spouse when a Section 6015 claim is filed, and that spouse has the right to participate in the proceedings. For divorcing business owners, this notification can complicate settlement negotiations, so the timing of the filing should be coordinated with the overall divorce strategy.

Protecting Yourself Before the Return Is Filed

The strongest position is to avoid the need for innocent spouse relief altogether. Business owners going through separation should consider filing MFS for the current tax year if they have any concerns about their spouse's tax reporting. While MFS carries rate penalties and deduction limitations, it eliminates the joint liability risk entirely. For prior-year joint returns that have already been filed, a thorough review of the returns can identify potential understatement issues before the IRS does. If understatements are discovered, a business owner can file an amended return or a qualified amended return to correct the record and potentially reduce penalties under the voluntary disclosure framework.

Maintaining detailed records of your own income, deductions, and financial activities throughout the marriage is also critical. If an innocent spouse claim becomes necessary, documentation showing that you had no involvement in your spouse's business affairs and no access to their financial records strengthens the case considerably. Bank statements, email correspondence, and records of household expenses can all support a claim that you lacked actual or constructive knowledge of erroneous items on joint returns.

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This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.