Traditional Relief From Community Property Law
In certain situations, one spouse opts to exclude a community asset when filing his or her taxes. In this case, the requesting spouse can ask for traditional relief from community property law. However, there are requirements that must be met.
When a taxpayer omits (does not include) an item of community income from his or her gross income, relief is not requested until the IRS challenges the omission (Reg Sec.1.66-4). Thus, there is no assurance the taxpayer will prevail.
Qualifications
The requesting spouse does not include an item of community property in his or her gross income if ALL of the following apply:
-
The requesting spouse doesn't file a joint return for the tax year,
-
The requesting spouse did not include in gross income for the taxable year an item of community income properly includible therein, which, under the rules contained in Code Sec. 879(a) (treatment of community income when one or both spouses is a nonresident alien), would be treated as the income of the nonrequesting spouse, and,
-
The individual establishes that he or she didn't know of, and had no reason to know of, that item of community income., All the facts and circumstances are considered in determining whether a requesting spouse had reason to know of an item of community income. The relevant facts and circumstances include, but aren't limited to:
-
The nature of the erroneous item;
-
The amount of the erroneous item relative to other income items;
-
The couple's financial situation;
-
The requesting spouse's educational background and business experience;
-
The extent of the requesting spouse's participation in the activity that resulted in the erroneous item; and
-
Whether the item of community income was reflected on earlier year's returns (e.g., investment income that was regularly reported on earlier years' returns).
-
If the requesting spouse is aware of the source of community income or the income-producing activity, but is unaware of the specific amount of the non-requesting spouse's community income, the requesting spouse is considered to have knowledge or reason to know of the item of community income. The requesting spouse's lack of knowledge of the specific amount of community income does not provide a basis for relief under this section.
4. Taking into account all facts and circumstances, it's inequitable to include that item of community income in the individual's gross income. A factor in determining inequitability is whether the requesting spouse benefited, directly or indirectly, from the omitted item of community income.
CAUTION
Traditional relief is on an item-by-item basis.
Requesting Relief
Relief is not requested until the requesting spouse receives notification of an audit or a letter or notice from IRS stating there may be an outstanding liability with regard to that year. File Form 8857 - Innocent Spouse.
The latest time for requesting relief is six months before the expiration of the statute of limitations on assessments, including extensions, against the non-requesting spouse for the tax year that is the subject of the claim for relief, unless the examination of the requesting spouse's return starts during that six-month period. If the examination of the requesting spouse's return starts during that six-month period, the latest time for requesting relief is 30 days after the start of the examination.
A requesting spouse who doesn't meet the above time limitations may be eligible to request equitable relief, since the timing requirements for requesting equitable relief are broader.