Tax Brake with Robert G. Nath, Esq.

W was 68, her H 77 and suffering from congestive heart failure. They had income only from social security. Their expenses were more than their income; the children helped make ends meet. H had embezzled money 20 years ago, and W had been held an innocent spouse for two tax years, but now a third was in question.

The Court held that W qualified under the “equitable relief” provisions of the innocent spouse rules. This standard requires the court to take into account “all the facts and circumstances.” Among these, according to an IRS explanation, are whether (1) the taxpayer is separated or divorced, (2) suffered abuse, (3) significantly benefited from the item that gave rise to the deficiency, (4) made a good faith effort to comply with the revenue laws, (5) would suffer economic hardship if relief is denied, (6) knew or had reason to know of the deficiency item, (7) the deficiency is attributable to the nonrequesting spouse, and (8) either spouse is legally obligated to pay the liability pursuant to the divorce decree.

Here, many of these factors were either conceded or not present. The court focused on economic hardship. The sole source of income being social security, the fact W could only just pay her hills, that she had to borrow from her children, all weighed in her favor.

The court also found that W did not significantly benefit from H's embezzlement, and that she had made a good faith effort to comply with the tax laws.

For all these reasons, W won. However, the case illustrates that the IRS carefully examines each case on its own and will dispute them, even to Tax Court, when it believes it has a justifiable position.