Innocent Spouse Relief: A Fair Result In California

Working at IRSMedic World HQ can be taxing at times. (Pun absolutely intended).  Many of my clients have seen their lives torn apart by the Internal Revenue Service, or a state taxing authority, and they've hired our firm because they want to make things right. Tax problems can cause a range of emotions, from indifference to extreme anger. I've seen a lot. I've seen tax problems that would make a grown man cry, and I've seen the IRS take collection action that would spur a gentle, 90-year-old grandmother into a fit of rage.


My job is to focus on solutions and try to work with my clients to think of things objectively, from a dollar and cents perspective. I've found that it's not always that simple. Sometimes a tax situation is just unfair.


There's a concept that you learn early in law school called "equity."  In a situation where strictly applying the law would lead to an unfair result, then "equity" might be a way out. The Internal Revenue Code includes several provisions which empower the IRS to make decisions on the basis of fairness. For example, an Offer in Compromise might be submitted on the basis of Equitable Tax Administration. Also, in the case of an Innocent Spouse claim that does not strictly adhere to the requirements of the Tax Code and regulations, Equitable Relief might be available. I want to share a story about an Innocent Spouse case that came across my desk recently, and the result I was able to achieve for my client (names and details have been changed for purposes of anonymity).


State vs. Federal Innocent Spouse Programs


Maddie came to our office after her bank account (of roughly $20,000) was emptied out by a California Franchise Tax Board bank levy, but they weren't done yet. According to their records, Maddie, a 75-year-old retiree, still owed California an additional $80,000 in taxes and California was gunning for it. Here's why:


She had been divorced from her ex-husband, Jeff, for close to a decade, but the tax liability was the result of his business dealings in California over 15 years ago – when they were married. The problem was that they had filed a joint return for that year, and when you sign a joint return, you are agreeing to be held jointly and severally liable for any tax due on that return or later assessed in an audit. Even though Maddie was a homemaker and left the business issues to Jeff, she was now being held responsible for his mistakes. Sometimes a tax situation is just unfair. And what I wanted for Maddie was Justice. She was OK with paying California an additional $30,000.00 and calling it even.  <donning cape> That wasn't going to fly with me. 


Innocent Spouse and Equitable Relief cases really boil down to one statement: "this isn't fair."  The trick is dressing up that statement in a way that will achieve the result you are after. The argument may seem simple ("this isn't fair") and the form (Form 8857 for the IRS) may be short. But it is the story, the law, the regulations, and the agency publications that will ultimately determine the outcome. The trick is tying it all together in a way that screams "THIS ISN'T FAIR" without ever putting those words down on paper. It isn't just about convincing a government employee that they want to give you what you are asking for, you need to convince that employee that they can. 


I started researching the issue and gathered relevant facts (and the evidence to support these facts) and I made an argument to the California Franchise Tax Board based on their Innocent Spouse and Equitable Relief guidelines. I even argued that California should apply newer IRS guidance that the state has yet to adopt. And guess what? Maddie was relieved of the tax liability that was racked up her ex-husband, Jeff. That $20,000? She got that back as well!


Every Innocent Spouse claim is a claim of Equity

Nothing is more inequitable (unfair) in the world of taxes than when one person ends up on the hook for taxes that were racked up by someone else.  When those situations arise, a dollars and cents perspective won't do justice. The problem is that saying "this is unfair" will fail as a strategy 99% of the time. But that's why I'm here. My job is to say "this is unfair" without ever using those words. </donning cape> Read testimonials about Parent & Parent LLP here