Indicators of Unfairness
The IRS considers all facts and circumstances to determine if it is unfair to hold the innocent spouse responsible for an underpayment or understatement of tax. The degree of importance of each factor varies depending on the requesting spouse’s circumstances and the factual context of the marriage. The factors are designed to be guides, and no one factor, or a majority of factors necessarily determines the outcome. (Notice 2012-8) Examples of factors considered include:
Favorable Factors
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Separation or divorce of the involved spouses.
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Economic hardship
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Abuse
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Lack of knowledge by the innocent spouse
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Non-innocent spouse’s obligation under a divorce decree to pay the tax.
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The tax owed is attributed to the non-innocent spouse. Unfavorable Factors:
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Innocent spouse had knowledge of the understated items.
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Innocent spouse received significant benefit from the unpaid tax.
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Lack of good faith effort to comply with tax law by the innocent spouse.
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Innocent spouse has obligation to pay the tax under a divorce decree.
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Tax for which relief request is made is attributable to the innocent spouse.
Example - Applying the Unfairness Factors: Nathan and his spouse Rae filed a joint 2022 return which showed a tax liability of $10,000. Nathan wanted to pay half the liability with funds he had saved prior to marriage and the other half with loan proceeds of $5,000. He made the necessary financial arrangements for these transactions and received two $5,000 checks which he gave to Rae to pay the 2022 taxes. However, unknown to Nathan, Rae paid only $5,000 with the tax return and used the $5,000 loan proceeds to go on a clothes shopping spree for herself. The IRS later billed for the unpaid $5,000 and flabbergasted Nathan hurried to his accountant for advice. His accountant recommended seeking relief from the tax liability due under the innocent spouse rules, so Nathan filed Form 8857.
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Economic Hardship
The IRS, in Rev. Proc. 2013-34, has set out criteria for quantifying this factor by providing minimum standards based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. An economic hardship exists if satisfaction of the tax liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses, taking into consideration the requesting spouse’s current income and expenses and the requesting spouse’s assets. The Service will compare the requesting spouse’s income to the Federal poverty guidelines for the requesting spouse’s family size and will determine by how much, if at all, the requesting spouse’s monthly income exceeds the requesting spouse’s reasonable basic monthly living expenses. For example, this factor will weigh in favor of relief if the requesting spouse’s income is below 250% of the Federal poverty guidelines, unless there are assets from which the requesting spouse can make payments towards the tax liability and still adequately meet reasonable basic living expenses. The lack of a finding of economic hardship does not weigh against relief, as it did under Rev. Proc. 2003-61, and instead will be neutral.