Tax Brake with Robert G. Nath, Esq.

The husband of a divorced couple applied for innocent spouse relief, claiming he knew nothing of his ex-wife's embezzlement income. Instead of traditional innocent spouse relief, however, the husband applied for a “separate liability election.” That provision, new in the tax code, allows one spouse to elect to separate his/her income, deductions, and taxes from the other spouse if certain conditions are met. That's what the husband did here.

However, the law says he doesn't get this relief if he had “actual knowledge” of his wife's omitted income. Naturally, the IRS inquired on this issue and litigated what “actual knowledge” means and who has the burden of proof. The tax code says it's the government, and the Tax Court has now agreed. First, “actual” means just that; you can't infer knowledge, said the court, no matter what the circumstances. Second, the government bears the burden of proof on this issue. And, said the court, the standard for this burden is “preponderance of the evidence,” generally meaning “more likely than not.”

So this is a taxpayer victory, affirming the plain meaning of the three-year old separate liability election provisions. No doubt many other spouses will take advantage of this new, little-known relief provision in the coming years.

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