Innocent Spouse

Under current tax laws, when a married couple files a joint federal income tax return, each spouse become individually responsible for paying the entire tax bill. As a result, one spouse can be held liable for tax deficiencies assessed after a joint return was filed, even if the additional taxes were solely attributable to the income of the other spouse. If the Internal Revenue Service (IRS) cannot collect the additional taxes owed on the unreported income from the culpable spouse, it may seek to collect the money from the "innocent spouse." The innocent spouse may obtain relief from the additional tax liability if certain conditions are met. However, GAO found that the existing innocent spouse provisions are complex, hard to understand, and pose serious challenges for IRS and taxpayers. This testimony discusses both administrative and statutory options for improving the innocent spouse provisions as well as the issue of replacing the joint and several liability standard with a proportionate liability standard.

GAO noted that: (1) under current law, only about 1 percent of couples who filed joint returns in 1992 had additional tax assessments that potentially met the dollar threshold for innocent spouse relief; (2) if only divorced taxpayers were counted, about 35,000 of the 587,000 couples with additional tax assessments of more than $500 for 1992 may have been eligible for innocent spouse relief; fewer would probably actually qualify; (3) the limited information available indicated that IRS received few requests for innocent spouse relief and denied most of them; (4) the current provisions may not ensure that all deserving taxpayers receive equivalent relief; (5) one way to address concerns with the innocent spouse provisions would be to replace the joint and several liability standard with a proportionate liability standard; (6) under this standard, each spouse becomes individually responsible for the entire amount of the tax associated with a joint return; (7) under a proportionate liability standard, couples would be responsible only for the taxes generated by their individual incomes and assets; (8) requiring IRS to be bound by divorce decrees is impractical for two major reasons; (9) first, federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; (10) thus, there is currently no legal forum where IRS and the parties to a divorce could resolve issues relating to both tax and divorce matters; (11) second, this proposal could require IRS to become involved in every divorce settlement to ensure that the government's interest is protected; (12) in community property states, IRS can levy one spouse's income to satisfy the premarital tax debts of the other spouse because of the joint ownership of property in those states; (13) in contrast, IRS cannot levy the income of one spouse to pay the premarital tax debt of the other spouse in common law states because spouses do not have legal entitlement to each other's property; (14) since IRS does not maintain data on how often it levies community property to settle premarital tax debts, 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; and (15) the Department of Treasury's report parallels GAO's report on identifying ways to improve the administration of the current innocent spouse provisions.