Tax Policy

When a married couple files a joint federal income tax return, each spouse becomes individually responsible for paying the entire amount of the tax associated with that return. Because of this joint and several liability standard, one spouse can be held liable for tax deficiencies assessed after a joint return was filed that were solely attributable to the actions of the other spouse. However, when one spouse, without the knowledge of the other, incurs additional taxes, the other potentially "innocent spouse" can obtain relief from the additional tax liability if certain conditions are met. In response to concerns about the effectiveness of the current innocent spouse provisions and other perceived inequities caused by the joint and several liability standard, this report discusses (1) the potential universe of taxpayers who may be eligible for innocent spouse relief, (2) the Internal Revenue Service's (IRS) procedures for handling requests for innocent spouse relief, (3) whether the innocent spouse provisions afford the same treatment for all taxpayers, (4) the potential effects of replacing the joint and several liability standard with a proportionate liability standard, (5) the potential effects on IRS of requiring it to abide by the terms of divorce decrees when those decrees allocate tax liabilities, and (6) the potential effects on IRS of changing the law so that community income of one spouse cannot be seized to satisfy tax liabilities incurred by the other spouse before their marriage.

GAO noted that: (1) it estimated that about 587,000 of the 48 million couples who filed joint returns in 1992 had additional tax assessments of more than $500; (2) this estimate represents the maximum number of taxpayers potentially eligible for innocent spouse relief, however, fewer would probably actually qualify; (3) although any taxpayer signing a joint return may seek innocent spouse relief, according to IRS officials, divorced taxpayers are more likely to face the most egregious problems; (4) the limited information that was available indicated that IRS received few requests for innocent spouse relief and denied most of them; (5) GAO observed that IRS publications provide little information on how to request innocent spouse relief and that the publications covering procedures related to the need for relief have no information on relief; (6) critics of the innocent spouse provisions contend that the current provisions do not ensure that all deserving taxpayers receive equivalent relief; (7) GAO estimated that for tax year 1992, an additional 42,600 divorced taxpayers might have been eligible for innocent spouse relief if the dollar thresholds had been eliminated; (8) an alternative way to ensure that taxpayers are not held liable for their spouses' taxes would be to replace the joint and several liability standard with a proportionate liability standard; (9) under such a standard, taxpayers would be responsible only for the taxes generated by their individual incomes and assets or, for taxpayers living in community property states, for the tax associated with one-half of the community income; (10) divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled; (11) requiring IRS to be bound by divorce decrees is impractical for two major reasons; (12) federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; (13) IRS officials also raised related concerns, such as whether their interpretation of lengthy and complex divorce decrees would increase the number of appeals and whether divorce decrees would be manipulated to reduce tax liabilities (14) IRS can treat taxpayers living in community property states differently from taxpayers living in common law states when collecting taxes; and (15) since IRS does not maintain data on how often these levy actions occur, GAO could not assess the potential impact on IRS of changing the law to treat everyone the way it treats taxpayers in common law states.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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