United States General Accounting Office

GAO Report to the Committee on Ways and

Means, House of Representatives, and

the Committee on Finance, U.S. Senate

March 1997 TAX POLICY

Information on the

Joint and Several

Liability Standard

GAO/GGD-97-34

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-271456 

March 12, 1997

The Honorable William V. Roth, Jr.

Chairman, Committee on Finance

United States Senate

The Honorable Daniel P. Moynihan

Ranking Minority Member, Committee

 on Finance

United States Senate

The Honorable Bill Archer

Chairman, Committee on Ways

 and Means

House of Representatives

The Honorable Charles B. Rangel

Ranking Minority Member, Committee

 on Ways and Means

House of Representatives

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, independently and without the

knowledge of the other spouse, incurs the additional taxes, the other

potentially “innocent spouse” may obtain relief from the additional tax

liability if certain conditions are met. Because of concerns about the

effectiveness of the current innocent spouse provisions and other

perceived inequities caused by the joint and several liability standard,

section 401 of the Taxpayer Bill of Rights 2 directed us to study and report

on several issues related to the joint and several liability standard that

applies to jointly filed federal income tax returns.1

 Accordingly, this report

discusses (1) the potential universe of taxpayers that may be eligible for

innocent spouse relief, (2) the Internal Revenue Service’s (IRS) practices

and procedures for handling requests for innocent spouse relief,

(3) whether the innocent spouse provisions provide the same treatment

for all taxpayers, (4) the potential effects of replacing the joint and several

1

Public Law 104-168, July 30, 1996. The law also directed the Secretary of the Treasury to study and

report on the same issues discussed in this report. IRS and Treasury staff jointly conducted the study.

The report had not been issued at the time of our review.

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liability standard with a proportionate liability standard,2 (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.3

Background A traditional argument for applying a joint and several liability standard to

joint returns is that married couples form a single economic unit, so

spouses who benefit from each other’s income and assets can be held

responsible for the total tax liability generated from the income and assets.

The benefit of joint returns is that married couples are taxed as if their

combined income were equally split between the spouses. For married

couples with substantially disproportionate incomes, such

income-splitting may lower their overall taxes because some of the higher

earner’s income could fall into a lower tax bracket and be taxed at a lower

rate than if it had all been taxed as the income of one person.

The benefits of income-splitting first became available in community

property states in 1930 as a result of the Supreme Court case of Poe v.

Seaborn [282 U.S. 101 (1930)]. In that case, the Court held that in

community property states, the wife is vested with a half-interest in her

husband’s income. Therefore, for federal tax returns, income was divided

equally between husband and wife, regardless of who earned it. The

benefits of income-splitting were denied couples living in common law

states as a result of another 1930 Supreme Court case, Lucas v. Earl [281

U.S. 111 (1930]. In that case, the Supreme Court rejected a couple’s private

agreement assigning one-half of each spouse’s earnings to the other

spouse for federal income tax purposes. Income-splitting for all joint filers

was added to the Internal Revenue Code by the Revenue Act of 1948 as a

means of equalizing the tax rates for married couples in common law

states with the tax rates for those living in community property states.

Congress subsequently determined that in some instances, it was

inequitable to hold taxpayers liable for additional taxes resulting from

their spouses’ unreported income. A commonly cited example was a

spouse who, unknown to the other spouse, was engaged in an illegal

2

Under proportionate liability, each taxpayer is responsible only for the taxes resulting from his or her

individual income, even when such income is reported on a joint return. Proportionate liability was

generally the standard followed before the Revenue Act of 1938, which established joint and several

liability on joint returns.

3

In community property states, the income and assets of each spouse belong equally to the other

spouse and are available to pay the debts (including taxes) of either spouse.

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activity, did not report the illegal income, and was subsequently caught

and assessed the taxes on the illegal gain. In 1971, Congress enacted the

innocent spouse provisions in the Internal Revenue Code (section 6013(e))

to recognize the inequity of holding spouses liable for additional tax

assessments in certain cases. The provisions were broadened in 1984 to

provide relief from liabilities resulting from grossly erroneous deductions,

credits, or basis (i.e., the purchase price of an asset), in addition to

unreported income. The current innocent spouse provisions allow relief

from the joint and several liability standard when

• the innocent spouse has filed a joint return with the culpable spouse;

• the spouse did not know and had no reason to know there was a

substantial tax understatement (knowledge test); and

• taking into account all the facts and circumstances, it is inequitable to hold

the spouse liable for the additional tax attributable to the substantial

understatement of the culpable spouse.

In addition, the spouse requesting relief must meet certain dollar

thresholds that vary depending on the cause of the additional assessment:

• A tax liability resulting from an omission of gross income must exceed

$500.

• A tax liability resulting from a deduction, credit, or basis that has no basis

in fact or law must exceed $500 and also be in excess of (1) 10 percent of

the innocent spouse’s adjusted gross income for their preadjustment tax

year if the taxpayer’s income is less than or equal to $20,000; or

(2) 25 percent of the innocent spouse’s income if the taxpayer’s income is

greater than $20,000. If the innocent spouse has remarried, the new

spouse’s income is included in this calculation.

IRS generally follows state law in regard to ownership of property, and the

states define ownership of property very differently. In community

property states, the income and assets (property) of each spouse belong

equally to the other spouse and can be attached to pay the debts (including

taxes) of either spouse.4

 About 27 percent of all taxpayers live in the nine

community property states (Arizona, California, Idaho, Louisiana, Nevada,

New Mexico, Texas, Washington, and Wisconsin). In common law states,

spouses do not have an inherent right to each other’s income and assets.

As a result, there is a distinct difference in the application of joint and

4

Community property principles apply to the income and assets acquired during the marriage.

Residents of community property states may own separate property, which generally consists of

property owned before the marriage or property acquired by gift or inheritance. The laws of the

individual states govern the treatment of such separate property and the income derived from it.

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several liability between the residents of community property states

versus common law states. For example, a married couple living in a

common law state can avoid joint and several liability by filing a “married,

filing separate” return, whereas filing a “married, filing separate” return in

a community property state will not necessarily result in a similar

avoidance of tax.

Results in Brief We estimated that about 587,000, or about 1 percent, of the 48 million

couples who filed joint returns in 1992, the most recent year for which

data were available, had additional tax assessments of more than $500.

This estimate represents the maximum number of taxpayers potentially

eligible for innocent spouse relief; however, fewer would probably actually

qualify. Some taxpayers would also probably have been assessed

additional taxes as a result of overstated deductions, credits, or basis,

which have other dollar thresholds in addition to the $500 threshold. Some

of these taxpayers would also probably have been ineligible for relief

because they would not have met the knowledge test of the innocent

spouse provision. However, IRS did not have the data that we would need

to estimate the number of taxpayers that fell into these categories.

Furthermore, 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 because their current

assets could be seized to satisfy tax obligations accruing from joint returns

filed prior to the divorce. Assuming a 2 percent per year divorce rate, we

estimated that about 35,000 of the 587,000 couples with additional tax

assessments for 1992 were divorced in the 3 years since the end of the

1992 tax year and thus a spouse from these couples may have been more

likely to consider applying for relief.

The limited information that was available from several operating units

within IRS indicated that IRS received few requests for innocent spouse

relief and denied most of them. Although information was not available to

determine why few requests were made, we 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

(e.g., tax examination and appeals) have no information on relief, and IRS

has no specific form or process for applying for innocent spouse relief.

Critics of the innocent spouse provisions contend that the current

provisions do not ensure that all deserving taxpayers receive equivalent

relief. For example, they believe that the dollar thresholds for claiming

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B-271456 

innocent spouse relief may preclude some deserving taxpayers from

obtaining relief because of the amount of their liability. Four states

apparently agree because, for state income tax purposes, they have no

dollar thresholds. Assuming a 2 percent per year divorce rate, we

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. Since the innocent spouse relief provisions relieve

the innocent spouse of responsibility for a joint liability rather than forgive

the tax obligation, we could not estimate the revenue impacts of modifying

the provisions because data were not available on how successful IRS has

been in collecting from culpable spouses.

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. 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. Options for

administering a proportionate liability standard include (1) eliminating

joint returns and requiring all taxpayers to file separately, (2) retaining

joint returns but modifying them so that each spouse’s income and

deductions would be reported in separate columns, and (3) retaining the

current joint return requirements but applying proportionate liability only

in cases where there are unpaid taxes or subsequent tax assessments.

Each of these options represents a trade-off between clearly establishing

each taxpayer’s liability and the amount of paperwork and administrative

burden created for taxpayers and IRS. The separate and modified joint

return options would increase taxpayers’ filing burden and IRS’

return-processing costs. All three options could increase the costs of IRS’

audit, underreporter, and collection programs.

Divorcing couples may specify in their divorce decrees how future

liabilities resulting from their prior joint returns are handled. IRS officials

at the local level said many taxpayers are surprised to discover that IRS is

not bound by these agreements because it is not a party to the decree.

Requiring IRS to be bound by divorce decrees is impractical for two major

reasons. First, federal tax matters are the exclusive jurisdiction of certain

federal courts, while divorce matters are generally handled by state courts.

Thus, there is currently no legal forum where IRS and the parties to a

divorce could resolve issues relating to both tax matters and divorce

proceedings. Furthermore, this proposal could require IRS to become

involved in every divorce settlement or trial. In 1994, about 1.2 million

Page 5 GAO/GGD-97-34 Income Tax Liability
B-271456 

divorce decrees were granted in the United States. 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.

IRS can treat taxpayers living in community property states differently from

taxpayers living in common law states when collecting taxes. Unlike in

common law states, IRS can levy one spouse’s income to satisfy the

premarital tax debts of the other spouse in community property states

because of the joint ownership of property in those states. In contrast, IRS

cannot levy the income of one spouse to pay the premarital tax debts of

the other spouse in common law states because spouses do not have a

legal entitlement to each other’s property. Since IRS does not maintain data

on how often these levy actions occur, we could not assess the potential

impact on IRS of changing the law to treat everyone the way it treats

taxpayers in common law states.

Scope and

Methodology

To calculate the potential universe of innocent spouses, we used IRS’

Statistics of Income data for tax year 1992 to estimate the number of joint

returns filed that year and whether or not the taxpayers lived in

community property states. We used IRS’ information on the results of its

1992 underreporter program to estimate the number and dollar amount of

such assessments made against joint filers. We also used the Audit

Information Management System (AIMS) database to identify the number

and amount of audit assessments made against tax year 1992 joint returns.

Finally, we used data from the Bureau of the Census and the Department

of Health and Human Services to calculate an annual divorce rate and

estimate the number of joint filers that divorce each year.

To determine IRS’ practices and procedures for handling innocent spouse

cases, we interviewed IRS officials at headquarters, four district offices,

and three service centers to discuss their procedures for identifying and

processing innocent spouse cases. We selected the Baltimore,

Philadelphia, Arkansas-Oklahoma, and San Francisco District Offices and

the Philadelphia, Austin, and Fresno Service Centers to give a diverse

geographic perspective. We also reviewed innocent spouse cases at the

San Francisco District Office and the Fresno Service Center located near

our San Francisco office. In addition, IRS, as part of its own efforts to

assess the problems related to divorced and separated taxpayers, had

requested five Problem Resolution Offices to forward the innocent spouse

Page 6 GAO/GGD-97-34 Income Tax Liability
B-271456 

cases handled between January and June 1996 to its Problem Resolution

Office in headquarters. We reviewed the 31 innocent spouse cases.

To determine whether the innocent spouse provisions provide the same

treatment to all taxpayers, we reviewed the literature examining the

provisions and IRS data, and compared the federal innocent spouse

provisions to state innocent spouse provisions.

To determine the potential effects of changing the current joint and

several liability standard to a proportionate liability standard, we used IRS’

Statistics of Income data for tax year 1992, underreporter assessments,5

and the AIMS database to estimate the number of taxpayers who filed using

the “married, filing jointly” status. We also worked with IRS to develop an

estimate of the number of taxpayers who had an assessment made against

a previously filed joint return to estimate the universe of taxpayers who

would have been affected by any changes to the standard. In addition, we

reviewed proposed alternatives to the joint and several liability standard

prepared by the American Bar Association (ABA) and the American

Institute of Certified Public Accountants (AICPA). We also met with North

Dakota state officials, who administer a proportionate liability standard on

joint state income tax returns. To determine the potential tax

administration issues and taxpayer burden associated with establishing a

proportionate liability standard, we developed a stratified probability

sample of 200 joint tax returns from IRS’ tax year 1992 Statistics of Income

file to estimate the amount of income that could be identified as either

joint or separate income. We projected this sample to the universe of

48 million taxpayers who used the “married, filing joint” status at a

95 percent confidence level.

To determine the potential effects on IRS of requiring it to be bound by

divorce decrees, we analyzed the legal ramifications of binding IRS to the

terms of lower court decisions. We also discussed the benefits and

problems associated with following the provisions of divorce decrees with

officials from IRS and officials from California, Wisconsin, and Delaware,

whose state tax agencies are bound by divorce decrees.

To determine the potential effects on IRS of changing the law to limit its

ability to attach community property, we discussed with IRS officials the

5

In its underreporter program, IRS computers match income shown on information returns (e.g., forms

W-2 and 1099 for interest and dividends) with income that taxpayers report on their tax returns to

determine whether taxpayers reported all their income. When discrepancies are found, IRS contacts

taxpayers to resolve the issue and assess additional taxes, if required.

Page 7 GAO/GGD-97-34 Income Tax Liability
B-271456 

policies related to the attachment of income and assets of one taxpayer to

pay the debts incurred by his or her spouse before the marriage.

We performed our review from February 1996 through September 1996 in

accordance with generally accepted government accounting standards. We

requested comments on a draft of this report from the Commissioner of

Internal Revenue, which we received on January 15, 1997. These

comments are discussed on pages 23 to 25, and a copy of the comments

are included in appendix VI.

Estimated Universe of

Potential Innocent

Spouses

Because IRS did not have data on the number of innocent spouse requests

filed, we developed an estimate of the potential universe of taxpayers that

could qualify under the current innocent spouse provisions. We estimated

that a spouse from up to 587,000 couples may have been eligible for

innocent spouse relief in 1992.

About 48 million joint tax returns were filed for tax year 1992. From IRS’

data on tax year 1992 audit and underreporter programs, we estimated that

1.25 million couples filing joint returns were assessed additional taxes

under these programs—250,000 were audit assessments and 1 million were

underreporter assessments. Of these 1.25 million returns, about 587,000

had additional tax assessments exceeding $500, which is the minimum

dollar threshold required for innocent spouse relief. Appendix I describes

the methodology we used to make these estimates.

However, our estimate of 587,000 couples represents the maximum

number of taxpayers potentially eligible for innocent spouse relief; fewer

would probably actually qualify. Some couples would also probably have

been assessed additional taxes as a result of overstated deductions,

credits, or basis, which have other dollar thresholds in addition to the $500

threshold. Data were not available that we would need to estimate the

number of joint taxpayers whose tax year 1992 additional tax assessments

resulted from overstated deductions, credits, or basis. Also, some of the

587,000 couples may not have qualified for innocent spouse protection

because they knew there was a substantial tax understatement. This

knowledge would have made them ineligible for relief even if the tax

deficiency was solely attributable to the actions of one spouse.

Although an unknown number of the 587,000 couples could potentially

seek innocent spouse relief, IRS officials told us that the severity of the

problem for taxpayers seeking such relief is much greater in the case of

Page 8 GAO/GGD-97-34 Income Tax Liability
B-271456 

divorced or separated taxpayers. Therefore, we also estimated the number

of taxpayers who could potentially be eligible for relief and may have

divorced during the 3 years since the 1992 joint returns were filed. Using a

2 percent per year divorce rate, we estimated that 35,000 divorced

taxpayers might have been eligible for innocent spouse relief for

additional tax assessments of more than $500. Appendix I describes how

we developed this estimate.

Limited Data on

Innocent Spouse

Claims Were Available

IRS did not accumulate data on the number of cases requesting innocent

spouse relief or the number of cases for which it grants such relief.

Although IRS did not systematically collect data on innocent spouse cases,

we found that some IRS operating units we visited maintained some

information on the innocent spouse cases they handled. The limited

information found on innocent spouse claims indicated that few requests

were received, and of these, most were denied. For example, records at

the Fresno Service Center indicate it received 90 Offer in Compromise

cases requesting innocent spouse relief during the 3 years between March

1993 and February 1996.6

 The service center denied 48 of these requests

because either (1) they dealt with taxes reported as owed on the original

return but not paid rather than with subsequent assessments; or (2) the

issues causing the assessment had already been resolved by IRS’ Appeals

Division or the Tax Court, and the claimant had agreed to the decisions.

The remaining 42 cases were referred to district offices for processing. As

of September 1996, 26 of these 42 cases had been resolved, with 7 being

allowed and 19 being denied.

We found that most of the cases handled by IRS’ Problem Resolution Office7

 were also denied. In fiscal year 1996, the Problem Resolution Office

requested information from five offices on innocent spouse cases. We

reviewed 31 Problem Resolution Office cases from 4 district offices and 1

service center where taxpayers raised the innocent spouse issue between

January and June 1996. For the 21 cases where a decision had been

reached, IRS granted relief in 10 cases. Appendix II shows our analysis of

the Problem Resolution cases we reviewed and summaries of some of the

cases.

6

IRS identified the 90 Offer in Compromise cases by a manual review of Offer in Compromise

correspondence files maintained in the Joint Compliance Branch. Although other requests for innocent

spouse relief may have been received at the Fresno Service Center during this time period, we were

unable to identify any other operating units at the center that maintained such information.

7

The Problem Resolution Program, administered by IRS’ Problem Resolution Office, is designed to

help taxpayers who have been unable to resolve their tax problems after repeated attempts to do so

with another IRS unit.

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Furthermore, according to IRS officials, the Tax Court denied relief in

one-third of the innocent spouse cases decided in 1996.

Information Available

on Applying for

Innocent Spouse

Relief Was Limited

Although innocent spouse relief is clearly established in law and

regulation, we observed that little information about the criteria for

granting it or how to apply for it was available from IRS sources. The

innocent spouse relief provisions are described in several IRS publications,

including Your Federal Income Tax (Publication 17), Divorced or

Separated Individuals (Publication 504), and Exemptions, Standard

Deduction, and Filing Information (Publication 501). However, these

publications do not provide any guidance on how to request relief.

Furthermore, they are developed to help taxpayers prepare their returns,

which is far in advance of the time that taxpayers might need information

on the possibility of innocent spouse relief.8

 In contrast, Examination of

Returns, Appeal Rights, and Claims for Refund (Publication 556) and

Understanding The Collection Process (Publication 594) are totally silent

about innocent spouse relief, even though these publications are more

directly related to the procedures that apply when taxpayers are billed for

their spouses’ taxes.

IRS Had No Well-Defined

Procedures for Requesting

and Processing Innocent

Spouse Claims

IRS also lacks well-defined procedures for taxpayers to request innocent

spouse relief. As noted, in those limited cases where IRS has publicized the

innocent spouse provisions, there is no guidance as to how taxpayers

should request such relief. In those innocent spouse cases we were able to

identify and review, we found no consistent process for claiming relief. In

most cases, we found that either the taxpayers or their representatives had

(1) contacted Problem Resolution Offices, which were established to

assist taxpayers who cannot resolve their problems through normal IRS

channels; or (2) requested relief through an Offer in Compromise, which is

used in the cases of taxpayers who cannot pay the full amount of the

balance due and decide to offer a lesser amount. The fact that taxpayers

are commonly using these two approaches to seek innocent spouse relief

may indicate that taxpayers are not provided with adequate guidance for

seeking relief by IRS.

In contrast, we found a much more taxpayer-friendly approach taken in

the case of “injured spouse” claims. Injured spouses are joint filers whose

joint refunds have been seized to pay certain of their spouses’ nontax

8

IRS generally does not begin auditing tax returns until about 6 months after the April 15 return due

date. Also, it generally does not begin investigating cases in its underreporter program until 7 months

after the April 15 filing date.

Page 10 GAO/GGD-97-34 Income Tax Liability
B-271456 

debts, such as past-due child or spousal support or a federal loan. Injured

spouses can apply for their portion of the joint refund by completing Form

8379, Injured Spouse Claim and Allocation. The 1040 instruction booklet

provides a clear explanation of the injured spouse provisions, the

qualifying conditions to be met, the specific form to be prepared, and how

the claim should be filed with IRS. The information is provided under the

refund line item instructions and tells taxpayers to attach the Form 8379 to

their tax return.

We also found confusion within IRS about how taxpayers should request

innocent spouse relief. The various IRS units we contacted to determine the

procedures they followed in handling innocent spouse cases took different

approaches to considering relief. For example, two district offices granted

relief using Offers in Compromise based on doubt of liability, while staff at

one service center routinely denied such requests as inappropriate. This

latter service center staff’s position was that Offers in Compromise based

on doubt of liability can be used only to argue that IRS miscalculated the

tax assessment, not to argue that a taxpayer is not liable for paying the

assessment. An official at one district office said he would advise

taxpayers to fill out an injured spouse form, while an official at a service

center said he was unaware that innocent spouse relief existed.

Modifying Tax Code

Provisions Could

Allow More Taxpayers

to Qualify for Relief

Critics of the innocent spouse provisions, such as ABA and AICPA, contend

that the current provisions do not ensure that taxpayers receive equitable

relief. For example, they said that the dollar thresholds included in the

provisions result in eligibility criteria for relief based on income and not

strictly on whether the spouse was innocent. Also, under the current

provisions, spouses can receive relief if deductions have absolutely no

basis in fact or law, but not if the deductions are simply erroneous.

Furthermore, spouses requesting relief must establish that they did not

know and had no reason to know their spouses were cheating on the

taxes. Critics note that the concept of “no reason to know” has not only

been interpreted differently by various courts, but is difficult for the

potential innocent spouse to prove. Appendix II includes several examples

that illustrate the issues involved in applying the innocent spouse

provisions.

According to IRS officials, Congress required innocent spouses to meet

certain dollar thresholds to qualify for relief as a way of filtering out

insignificant claims. The dollar thresholds clearly exclude some taxpayers

from relief and may be inconsistent with the goal of providing relief to

Page 11 GAO/GGD-97-34 Income Tax Liability
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deserving taxpayers. In the case of a tax assessment related to an

improper deduction, credit, or basis, the amount of the assessment must

exceed 10 percent of the claimant’s adjusted gross income (AGI) for the

claimant’s most recent tax year if such income is $20,000 or less, but the

assessment must exceed 25 percent of AGI if it is more than $20,000. Thus,

if a taxpayer’s AGI is $20,000 or less, relief could be available on

assessments of $2,000 or less, but if the taxpayer’s AGI is more than

$20,000, relief would be available only if the assessment exceeded $5,000.

This distinction appears to be more related to an ability to pay or degree of

hardship than to the innocence of the taxpayer. The logic behind these

dollar thresholds is clouded even more because the potential innocent

spouse’s AGI is based on the tax year ending before the notice of deficiency

(which may be several years after the tax year of the joint return) and

must include the income of any new spouse whether or not a joint return

was filed. Finally, the dollar thresholds prevent taxpayers with smaller

liabilities from obtaining relief, since the minimum understatement of tax

in all cases must be more than $500, which could preclude lower income

taxpayers from obtaining relief.

The 1984 Tax Reform Act extended relief to include deductions but

requires that such items be grossly erroneous, meaning there is no basis in

fact or law for the claim. The distinction between a deduction having no

basis in law or fact versus its just being erroneous is difficult to

comprehend and can lead to various interpretations by IRS and the courts.

This problem is compounded by the fact that IRS’ regulations governing

innocent spouse relief were issued in 1974 and have not been updated

since that time to incorporate the changes to the innocent spouse

provisions resulting from the 1984 Tax Reform Act.

The “knowledge” factor is perhaps the most subjective element in the

current innocent spouse provisions. For someone to prove that they did

not know and had no reason to know of a financial transaction undertaken

by his or her spouse would generally be difficult, if not impossible. IRS and

the courts consider circumstantial factors, such as education, involvement

in the family’s financial affairs, and lifestyle, in assessing this contention.

For example, one indicator that IRS uses to determine if spouses were

aware of the tax avoidance is whether they benefited by living a lifestyle

significantly better than could be supported by the reported income.

However, according to critics, a determination of whether a taxpayer’s

lifestyle was significantly better because of the tax avoidance is fairly

subjective and the courts have interpreted the criteria differently. Some

Page 12 GAO/GGD-97-34 Income Tax Liability
B-271456 

district offices have designated an employee as the innocent spouse

coordinator so that only one employee applies the knowledge test.

Some states have decided not to apply the federal innocent spouse

provisions and have modified them for state tax purposes. Our survey of

the District of Columbia and the 43 states that have personal income taxes

showed that 20 do not have innocent spouse provisions, 18 have innocent

spouse provisions based on the Internal Revenue Code, and 6 have less

restrictive provisions (see app. III for a listing of the states).

California, Iowa, Louisiana, and Oklahoma do not apply dollar thresholds

when granting innocent spouse relief, while New York applies a $100

threshold. Massachusetts does not apply the percentage of income

threshold for taxes resulting from grossly erroneous deductions. In

addition, California and Oklahoma do not require that deductions have no

basis in fact or law, simply that they be erroneous.

We estimated that if the federal innocent spouse tax code provisions had

been modified to eliminate the dollar thresholds as was done by

California, Iowa, Louisiana, and Oklahoma, the maximum number of

couples filing tax year 1992 returns potentially eligible for innocent spouse

relief would have been 710,000. Assuming a divorce rate of 2 percent per

year, we estimate that 42,600 of these couples would have divorced within

3 years.

Modifying the provisions to allow more taxpayers to qualify for innocent

spouse relief would likely result in some revenue loss because IRS might

not always be successful in collecting from the culpable spouse. However,

since IRS does not maintain data on how often it collects from the culpable

spouse, we could not estimate the size of the potential revenue loss. IRS

would also incur some additional collection costs associated with

pursuing the culpable spouse.

Potential Impact of

Replacing the Joint

and Several Liability

Standard With

Proportionate

Liability

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. Under the generally accepted

definition of proportionate liability, taxpayers would be held responsible

only for the taxes generated by their own individual incomes and assets or,

for taxpayers living in community property states, for the tax associated

with one-half of the community income. We identified three options for

administering a proportionate liability standard that represent trade-offs

Page 13 GAO/GGD-97-34 Income Tax Liability
B-271456 

between clearly establishing each taxpayer’s liability on their tax returns

and the amount of paperwork and administrative burden created for

taxpayers and IRS. Two options in addition to proportionate liability that

would limit IRS’ ability to hold taxpayers liable for their spouses’ taxes are

to (1) allow taxpayers to amend their filing status after the due date of the

return and (2) have each taxpayer identify on the return the percentage of

the total liability for which he or she would be responsible.

Comparison of the

Potential Impact of Three

Administrative Options on

Taxpayers and IRS

Our review of the literature identified three options for administering a

proportionate liability standard. The options are to (1) eliminate joint

returns and require all taxpayers to file separately,9

 (2) retain joint returns

but modify them so that each spouse’s income and deductions are

reported in separate columns, and (3) retain the current joint return

requirements but apply proportionate liability only in cases where there

are delinquent taxes or subsequent tax assessments. We evaluated the

potential effects of these options on IRS’ tax administration processes and

taxpayers’ burden. We did not consider how these options would

potentially affect tax revenues. Table 1 shows the pros and cons of the

three options for taxpayers and IRS.

9

Married couples currently have the option of filing separately, which in effect proportions their tax

liability to their own income, unless the couple lives in a community property state, in which case each

taxpayer is liable for the taxes associated with any separate income they may have and one-half of the

community income. However, only 5 percent of married taxpayers file separately, because the tax

rates are generally lower if they file a joint return.

Page 14 GAO/GGD-97-34 Income Tax Liability
B-271456 

Table 1: Pros and Cons of Different

Methods of Administering a

Proportionate Liability Standard Entity

Separate return

optiona

Modified joint return

optionb

Current joint return

optionc

Taxpayers

Pros

Cons

If divorced, individual

liability is more clearly

established. 

Must prepare two

returns but receive

limited or no benefit

while married.

May have a higher tax

liability under current

rate structure.

If divorced, individual

liability is more clearly

established. 

Must allocate joint

income, deductions,

and credits but

receive limited or no

benefit while married.

May have a higher tax

liability under current

rate structure.

No additional

paperwork burden.

Must establish

individual liability if

additional taxes

assessed.

IRS

Pros

Cons

Individual liability

more clearly

established.

Increased costs for

processing up to

twice as many returns

for married couples.

Increased difficulty in

matching income

reported on returns to

information returns.

Increased collection

costs because IRS

would have to collect

from each taxpayer

rather than a couple.

Individual liability

more clearly

established.

Might increase costs

for keying additional

data into computer

systems.

Increased difficulty in

matching income

reported on returns to

information returns.

Increased collection

costs because IRS

would have to collect

from each taxpayer

rather than a couple.

No additional

return-processing

costs.

Must establish

individual liability if

additional taxes

assessed.

Increased collection

costs because IRS

would have to collect

from each taxpayer

rather than a couple.

aEach spouse files separate return.

bIncome split out separately on joint return.

cProportionate income only for returns with unpaid taxes or subsequent tax assessments.

Source: GAO’s analysis of three proportionate liability options.

As shown in table 1, establishing proportionate liability on either a

separate or joint return is of limited or no benefit to married taxpayers

Page 15 GAO/GGD-97-34 Income Tax Liability
B-271456 

who generally would pay their income tax from joint assets or, if they

prefer, already have the option of choosing the “married, filing separately”

option to limit their liability to their own income. However, such a system

would clearly establish liability so that in the event of a tax shortfall,

divorced taxpayers could more easily establish the extent to which they

are liable for the unpaid taxes or assessments. This clarity, however, is

purchased at the cost of a significant burden for taxpayers. For example,

in tax year 1992, about 48 million couples filed joint returns but only about

4.5 million, or 9 percent, of them had unpaid tax liabilities or subsequent

tax assessments. Thus, under the separate and modified joint return

options, about 43 million more couples would have been burdened by

proportionate liability than would have potentially benefited. These

taxpayers would, at a minimum, have had to allocate their income,

deductions, and credits on a joint return and, if required to file separately,

file an additional return. Under the current joint return option, however,

only the 4.5 million couples with unpaid tax liabilities or additional tax

assessments would potentially have had to proportion their income,

deductions, and credits. Since, according to IRS, married couples are less

likely to request a proportionate split of their joint tax liability even if one

of the spouses is innocent, this number may overestimate how many

taxpayers would have actually benefited. We estimate that about 270,000

taxpayers would divorce during the 3 years after the returns were filed.

Furthermore, as we reported in September 1996,10 most married taxpayers

would pay higher total taxes if they filed separately rather than jointly. As

a result, requiring these taxpayers to file separately could create a higher

tax liability for a significant number of taxpayers under the current rate

structure.

IRS would also face increased return-processing costs under the separate

return or modified joint return-filing options, but not under the current

joint return option. For example, if taxpayers were required to file

separately, IRS would have to process up to 48 million additional returns

since each dual-income couple who formerly filed a single joint return

would have to file two returns. We estimate that if all 48 million joint filers

had to file two returns, it would cost IRS an additional $199 million to

process the additional tax returns. If married taxpayers were allowed to

file jointly but had to report their income and deductions separately on the

return—for example, a tax return column for each spouse—IRS might have

to make twice as many data transcription entries as it currently does. If all

10Tax Administration: Income Tax Treatment of Married and Single Individuals (GAO/GGD-96-175,

Sept. 3, 1996).

Page 16 GAO/GGD-97-34 Income Tax Liability
B-271456 

48 million joint filers reported two income streams, we estimate that the

additional data entry costs could be about $19 million.11 Appendix IV

describes our methodology for estimating these costs. IRS’ underreporter

program might also face additional computer matches, but we did not try

to estimate these increased costs. There would be no additional

return-processing costs under the current joint return option.

IRS’ tax compliance costs would increase under all three options; however,

it would experience significantly more costs under the separate and

modified joint return options than under the current joint return option.

For example, IRS’ underreporter program costs could increase because it

might have trouble matching proportionate tax returns (i.e., separate

returns and modified joint returns) to information returns. In our review of

a stratified probability sample of 200 joint tax returns for 1992 and the

information returns associated with these returns, we found that

77 percent of the income reported on the returns was separately held and

IRS would have little difficulty allocating this income. About 2 percent of

the income was reported as joint income, and we could not determine

whether 12 percent of the income was jointly or separately held. As a

result, IRS would generally have difficulty allocating this income. (App. V

lists the various income types and whether they were jointly or separately

held.)

For separate returns, IRS would not be able to readily match jointly held

income to determine whether all the income was reported unless it

cross-referenced the return to the spouse’s return. IRS would not have this

problem with the modified joint return because both spouses’ income on

the joint return could be totaled by computer and matched to information

returns. However, under both the separate and modified joint return

options, IRS could not easily determine whether jointly held income was

correctly apportioned without requiring taxpayers to either document the

information provided on the return or to maintain separate information

return accounts for all their income.

The advantage of establishing individual tax liability only if there was a tax

shortfall is that it would create little additional burden for taxpayers or IRS.

The disadvantage is that in the event of a tax shortfall, the taxpayers and

IRS would have to apportion a jointly reported tax liability between the two

taxpayers who signed the return. Since the current information reporting

system shows certain income and deductions jointly, Congress or IRS

11If the modified return had separate columns for each spouse and a total column, IRS might need to

key in only the total column, with the other data being used only if a claim for innocent spouse relief

arises.

Page 17 GAO/GGD-97-34 Income Tax Liability
B-271456 

would need to develop guidelines on how such income and deductions

should be handled.

In addition to increased underreporter costs, IRS would likely face

increased collection costs because it would have to collect from each

taxpayer rather than the couple or whichever taxpayer it found first.

Proportionate Liability

Established Only for

Unpaid Taxes or Audit

Assessments Would Be

Least Costly Option

The least costly and disruptive of the three proportionate liability options

would be to retain the current joint return and proportion income and

deductions only in cases where there are either unpaid taxes or additional

tax assessments. This option is endorsed by ABA and is practiced by North

Dakota—the only state that has a proportionate liability standard. Each of

these entities, however, advocates different methods for proportioning tax

liabilities.

ABA, which advocates a proportionate liability standard, proposes

apportioning the liability reported on the original return by calculating

(1) the spouses’ taxes as if they had filed using the “married, filing

separately” status; and (2) the percentage of the couple’s combined taxes

at the separate rate attributable to each spouse. IRS would then apply each

spouse’s percentage to the joint tax to determine each taxpayer’s liability.

The burden of proof for calculating the proportionate liability would fall

on the taxpayer. If IRS assesses additional taxes through an audit, the

deficiency would be the liability of whichever spouse generated the

unreported income or disallowed deduction, thus reducing the need for

innocent spouse relief. IRS officials believe that innocent spouse relief

would still be necessary in certain circumstances, such as when one

spouse purchases rental property in both spouses’ names and does not

inform the other spouse of the asset or income.

North Dakota is the only state that applies a proportionate liability

standard to the state income tax return. However, in practice, the North

Dakota Tax Commission administers the state tax system as if a joint and

several liability standard applied to the state joint returns because it

pursues whichever taxpayer it finds first to collect the tax liability. If a

divorced taxpayer claims that the tax liability is really attributable to the

ex-spouse, the state applies a proportionate liability standard to the joint

return. The state uses information returns from IRS to initially apportion

reported income and deductions. For income reported in both taxpayers’

names, the state assesses 100 percent of the joint income to both

taxpayers, and the burden then falls on the taxpayer to document a

Page 18 GAO/GGD-97-34 Income Tax Liability
B-271456 

different allocation. Joint deductions, such as those for dependents, are

allocated in proportion to the amount of income each spouse generated. In

other words, if a spouse generated 40 percent of the income, that spouse

could claim 40 percent of the deduction. Unreported income is attributed

to whoever earned the income.

North Dakota Tax Commission officials said that although proportionate

liability addresses the problems of some divorced taxpayers, it is not a

panacea that produces a just result in all cases. For example, state officials

noted that most farm land is held jointly, but the income is claimed only by

the farming husband. They questioned the fairness of allowing a wife to

disclaim any responsibility for income generated by an asset that was

owned by both spouses. State officials said they were also bothered that

nonworking taxpayers who are completely supported by their spouses can

then disclaim any responsibility for their spouse’s taxes. Such disclaimers

are particularly ironic in that nonworking spouses generally establish their

claims to assets during divorce proceedings by arguing that they enabled

their spouses to generate income. State officials questioned the fairness of

allowing taxpayers to make such arguments to bolster their claims to

assets and then to escape any tax liability by arguing the income was not

theirs.

Other Alternatives to

Proportionate Income

Two other alternatives to proportionate liability have been proposed or

adopted at the state level that would limit IRS’ ability to hold taxpayers

liable for their spouses’ taxes. First, IRS could allow taxpayers to amend

their filing status after the due date of the return. Nine states give

taxpayers the opportunity to do this. Second, AICPA advocates replacing the

joint and several liability standard with an allocated liability standard.

Under this standard, taxpayers would specify on the return a percentage

of the total liability for which they would each be responsible. If the

taxpayers failed to specify an allocation, they would each be responsible

for one-half of the tax liability.

Binding IRS to

Divorce Decrees

Would Be Impractical

Divorcing couples may specify in their divorce decrees how future

liabilities resulting from their prior joint returns are handled, i.e., one

spouse is entirely liable, both spouses are equally liable, or some other

permutation. However, IRS is not bound by these divorce decrees because

it is not a party to the decree. IRS officials at the local level said many

taxpayers are surprised to discover that IRS is not bound by divorce

decrees. According to ABA representatives, many divorce attorneys are not

Page 19 GAO/GGD-97-34 Income Tax Liability
B-271456 

well-versed in tax matters and do not realize that divorce decrees do not

provide adequate protection against additional federal taxes. According to

IRS officials and private sector practitioners, IRS’ practices in this regard are

similar to the practices of private sector creditors, such as credit card

companies, which do not feel they are bound by divorce decrees when

collecting on joint debts.

According to certain members of ABA’s Committee on Domestic Relations,

a legislative change to bind IRS to divorce decrees appears to be

impractical for two major reasons. First, current federal law provides no

mechanism whereby IRS can be a party to divorce proceedings. Federal tax

matters are the exclusive jurisdiction of the U.S. Tax Court, federal district

courts, the U.S. Claims Court, and the U.S. Bankruptcy Court. Divorce

matters, however, are generally handled by state courts. Federal courts

have traditionally refused to consider any legal action involving divorce.

Thus, providing a legal forum where IRS and the parties to a divorce could

resolve issues relating to both tax matters and divorce proceedings would

require a fundamental and extensive change in either federal tax law or

state domestic relations law.12

Second, binding IRS to divorce decrees could require IRS to become

involved in every divorce settlement or trial. In 1994, about 1.2 million

divorce decrees were granted in the United States. To be a party to this

many legal proceedings nationwide each year would create a significant

administrative burden for IRS. For example, the California Franchise Tax

Board is bound by divorce decrees if the decree (1) does not reduce

liability for income under the exclusive management and control of the

spouse, (2) does not affect taxes that have already been paid, and (3) has

been cleared by the California Franchise Tax Board when reportable gross

income exceeds $50,000 or the tax liability exceeds $2,500. Once the

California Franchise Tax Board has approved the proposed tax allocation,

the state becomes a party to the decree and is bound by it. State officials

said the requirement has increased demands on administrative resources,

and they had a backlog of about 100 requests for approval of tax

allocations.

12The views cited in this paragraph were submitted to the IRS in comments by ABA’s Committee on

Domestic Relations in response to Notice 96-19. The comments specifically noted that the positions

taken represented the individual views of the members who prepared it and did not represent the

position of ABA or of the Section on Taxation. With respect to the specific impact of such a legislative

change on taxpayers or IRS in each state, the comments also noted that to answer the question

definitively would require a law survey of all 50 states, which the Committee had not at that time done.

We also have not done a law survey of the 50 states and, therefore, also cannot answer this question

definitively.

Page 20 GAO/GGD-97-34 Income Tax Liability
B-271456 

The Delaware Division of Revenue is also bound by divorce decrees, even

though it is not a party to the decree. As a state agency, the Delaware

Division of Revenue considers itself bound by state court decisions.

However, most Delaware taxpayers file separately because of the state’s

rate structure, so the requirement creates little administrative burden. The

Wisconsin legislature recently passed legislation requiring the Department

of Revenue to be bound by divorce decrees beginning in the next tax year.

Wisconsin officials are just starting to consider the consequences of this

legislation on processing returns and revenue collection.

IRS officials also believe the number of appeals would increase because

divorce decrees can be lengthy and complex documents that are open to

more than one interpretation. Furthermore, IRS officials fear that divorce

decrees would be manipulated to reduce tax liabilities. For example, one

spouse might retain sole ownership of the couple’s residence, the couple’s

major asset, while the spouse without assets takes responsibility for the

taxes. Thus, IRS would not be able to place a lien against the residence to

force collection action for any delinquent taxes.

IRS Follows State

Property Laws in

Collecting Premarital

Tax Debts

About 13 million, or 27 percent, of all taxpayers who filed joint returns in

1992 lived in community property states. Some of these taxpayers may

have been faced with tax liabilities incurred by their spouses before their

marriage, which they would not have encountered if they lived in a

common law state. This disparate treatment between taxpayers residing in

community property states versus those living in common law states

occurs because IRS, as with other creditors, follows state law in classifying

married couples’ rights in property.

Because the income, including wages, of taxpayers living in certain

community property states is considered community property, IRS can

place a levy on the wages or other separate income of either spouse to

satisfy an existing tax debt, even if that tax debt was incurred by the other

spouse before their marriage. In contrast, IRS cannot place a levy on the

separate income of one spouse to pay the taxes due from the other spouse

in a common law state. Once the income of either spouse is placed in a

joint account it would be subject to IRS seizure in both community

property and common law states. However, the placement of wages into a

joint account is a matter of choice on the part of the taxpayers and can be

avoided if they so choose.

Page 21 GAO/GGD-97-34 Income Tax Liability
B-271456 

According to IRS officials, the agency does not have specific procedures for

placing levies on a spouse’s income for premarital taxes incurred by the

other spouse. Officials told us that because community property laws

differ from state to state, it is up to IRS collections personnel in each

community property state to determine whether they will levy a spouse’s

income. Nonetheless, under IRS’ collection procedures, levy action is

generally to be taken against the individually held income, such as wages,

of the taxpayer who incurred the tax debt or any jointly held income, such

as an interest-bearing account, not against the separate income of the

other spouse. In 1994, IRS issued 3 million third-party levies. However, the

agency did not know how many of these levies were placed on the income

of a spouse living in a community property state to pay the premarital tax

debts of the other spouse. As a result, we could not assess the effects of

changing the law to prevent IRS from making these types of levies.

The current tax code contains several provisions that override state

community property laws for noncollection activities. For example, the

innocent spouse provisions, section 6013(e), specifically prevent IRS from

following state community property laws in determining the tax liability

on omission from gross income. Also, under section 879(a), community

property laws do not apply to the earned income of nonresident aliens.

However, making an exemption for this specific collection activity for

premarital debts would set a precedent because it would require IRS to

ignore state community property laws for a collection activity.

Furthermore, unless the states change their community property laws,

such a change would not necessarily protect taxpayers’ assets. Private

sector creditors could continue to pursue community assets to satisfy

community debts even though IRS was precluded from attaching such

assets.

The inequities created by having IRS follow state community property laws

are not limited to levying the income of a spouse to pay the premarital tax

debts of the other spouse. For example, the eligibility criteria for injured

spouse relief on IRS Form 8379, Injured Spouse Claim and Allocation,

specifically state that “Overpayments involving community property states

will be allocated by the IRS according to state law. Claims from California,

Idaho, Louisiana, and Texas will usually result in no refund for the injured

spouse.” Thus, IRS follows state community property laws when

withholding refunds to apply against nontax debts.

Page 22 GAO/GGD-97-34 Income Tax Liability
B-271456 

Conclusions IRS does not track how often innocent spouse relief is requested or

granted; however, we estimate that a relatively small number of taxpayers

are eligible for relief under the current innocent spouse provisions. The

provisions, with their various qualifying criteria, are complex and difficult

to meet, and they require IRS staff to weigh various factors in deciding

whether to enforce the joint and several liability standard or to relieve

taxpayers of their joint liability. IRS provides limited information to

taxpayers about the availability of and criteria for relief and does not have

a tax form and procedures for requesting and granting relief.

Several proposals have been made to modify innocent spouse relief. More

taxpayers might qualify for relief if Congress eliminated or modified the

dollar thresholds to allow IRS to consider relief for taxpayers with

liabilities less than $500. Replacing the joint and several liability standard

with a proportionate liability standard may also provide additional relief to

taxpayers, but this alternative could create a significant administrative

burden for taxpayers and IRS. Requiring IRS to be bound by divorce decrees

appears to be impractical because of the legal and administrative hurdles

that would have to be resolved. Finally, if the law were changed to prevent

IRS from levying the income of one spouse to pay the premarital tax debts

of the other spouse, the inequities between taxpayers in community

property states and common law states might be reduced. However, no

data were available to assess the impact of such a change.

Recommendations To improve IRS’ administration of the innocent spouse provisions of the tax

code, we recommend that the Commissioner of Internal Revenue

(1) develop new or modify existing publications to better inform and

educate taxpayers about the availability of and criteria for innocent

spouse relief and, as part of that effort; (2) develop a tax form and

procedures for requesting and either granting or denying innocent spouse

relief. We also recommend that the Commissioner provide additional

internal guidance to IRS employees so that greater consistency in

processing innocent spouse cases can be achieved, establish a

cost-effective process for monitoring the consistency being achieved, and

update IRS’ regulations to reflect current requirements.

Agency Comments

and Our Evaluation

In written comments on a draft of this report (see app. VI), the

Commissioner of Internal Revenue generally agreed with our conclusions

and recommendations and said that the findings in our report present a

real possibility for imminent legislative reform of the innocent spouse

Page 23 GAO/GGD-97-34 Income Tax Liability
B-271456 

provisions. She said that, thus, it would be preferable to determine if the

current legislative session of Congress produces such reforms before

devoting the resources necessary to carry out our recommendations.

With this overall caveat, the Commissioner agreed with our first

recommendation that IRS should modify existing publications to better

inform taxpayers about the availability of innocent spouse relief. Likewise,

the Commissioner agreed with our second recommendation that IRS

develop a tax form and procedures for taxpayers to request innocent

spouse relief and for IRS to either grant or deny such relief. She pointed

out, however, that implementation of this recommendation would require

approval and clearance of such a form from the Office of Management and

Budget.

The Commissioner also agreed with our third recommendation that IRS

provide additional internal guidance to employees so that greater

consistency in processing innocent spouse cases can be achieved. She said

that the form and accompanying procedures developed under our second

recommendation would also largely meet the intent of the third

recommendation.

The Commissioner said that she understood the concern that prompted

our fourth recommendation to establish a cost-effective process for

monitoring consistency in processing innocent spouse cases. She said,

however, that existing management and information systems do not have

the capability to track issues on specific cases and that the only alternative

way to accomplish the recommendation, manual tracking of such cases,

would be cost prohibitive and less reliable.

It appears that the Commissioner misinterpreted the intent of our

recommendation. We fully agree with her points about the capability of

existing systems and the cost of manual tracking for such cases, and in

fact, we considered these issues in arriving at the wording of our

recommendation. Recognizing the problems with its existing systems and

manual tracking, our intent was to have IRS explore process options that

would not be cost prohibitive but would facilitate a greater level of

consistency in innocent spouse decisions. We thought that such

exploration was needed because we found a substantial amount of

inconsistency and subjectivity, both within and among IRS districts, on

how to interpret the knowledge factor in the current innocent spouse

provisions.

Page 24 GAO/GGD-97-34 Income Tax Liability
B-271456 

As an example of the kind of option that we thought IRS might explore in

response to our recommendation, we noted that some districts had

designated an employee as the innocent spouse coordinator, so that only

one employee in each of those districts applied the knowledge test. This

caused us to think that IRS could explore this as an option by first

determining whether the districts with such coordinators have achieved

greater consistency than those without coordinators. If this proves to be

so, IRS could then explore the cost effectiveness of establishing innocent

spouse coordinators in the remaining districts. By serving as focal points

and monitors in their respective districts, these coordinators might

facilitate more consistent decisions within districts, and by networking

with each other, they might facilitate consistency among the districts.

There may well be other options that IRS could explore before reaching a

final decision on the best approach and it was to that end that we worded

our recommendation to provide IRS with latitude to decide how it goes

about achieving a greater level of consistency in its administration of the

innocent spouse provisions.

Finally, the Commissioner agreed in principle that IRS should update its

innocent spouse regulations to reflect current law, but said that such

action would be premature until Congress determines whether to reform

the existing provisions. We agree with the Commissioner’s position on this

recommendation as well as with her overall statement that it makes sense

to wait until Congress decides whether to modify the existing law in the

current legislative session before devoting the resources necessary to

carry out most of our recommendations.

We are sending copies of this report to various other congressional

committees, the Secretary of the Treasury, the Commissioner of Internal

Revenue, and other interested parties. Copies will be made available to

others upon request.

Please contact me at (202) 512-8633 if you or your staff have any questions.

Major contributors to this report are listed in appendix VII.

Lynda D. Willis

Director, Tax Policy

 and Administration Issues

Page 25 GAO/GGD-97-34 Income Tax Liability
Contents

Letter 1

Appendix I 

Estimated Number of

Potential Innocent

Spouse Cases

30

Estimated Number of Innocent Spouse Cases That Could Result

From an Audit

30

Estimated Number of Innocent Spouse Cases That Could Result

From the Underreporter Program

31

Estimated Number of Married Taxpayers Who Divorce Each Year 32

Appendix II 

Information on

Problem Resolution

Office Innocent

Spouse Cases

33

Cases Between January and June 1996 33

Case Histories 33

Appendix III 

State Efforts to

Address Joint and

Several Liability

Issues

36

Appendix IV 

Estimated Costs for

Processing Separate

or Modified Joint

Returns

38

Estimated Cost of Processing Separate Returns 38

Estimated Cost of Processing Modified Returns 38

Page 26 GAO/GGD-97-34 Income Tax Liability
Contents

Appendix V 

Distribution of Joint,

Separate, and

Unknown Income for

1992 Joint Income Tax

Returns

39

Appendix VI 

Comments From the

Internal Revenue

Service

41

Appendix VII 

Major Contributors to

This Report

43

Tables Table 1: Pros and Cons of Different Methods of Administering a

Proportionate Liability Standard

15

Table I.1: Tax Year 1992 Closed Audit Cases for “Married, Filing

Joint” Returns

30

Table I.2: Estimates of Tax Year 1992 Taxpayers Who Could Be

Eligible for Innocent Spouse Relief Based on Underreporter

Assessments

31

Table II.1: Characteristics of Problem Resolution Cases 33

Table III.1: State Liability Standards, Innocent Spouse Provisions,

and Use of Divorce Decrees

36

Table IV.1: Estimated Cost of Processing an Additional 48 Million

Tax Returns

38

Table IV.2: Estimated Additional Data Entry Costs for Modified

Joint Returns

38

Table V.1: Percentage of Income Reported Jointly, Separately, or

Could Not Determine

40

Page 27 GAO/GGD-97-34 Income Tax Liability
Contents

Abbreviations

ABA American Bar Association

AGI Adjusted Gross Income

AICPA American Institute of Certified Public Accountants

AIMS Audit Information Management System

IRS Internal Revenue Service

Page 28 GAO/GGD-97-34 Income Tax Liability
Page 29 GAO/GGD-97-34 Income Tax Liability
Appendix I 

Estimated Number of Potential Innocent

Spouse Cases

This appendix describes how we derived the potential universe of

taxpayers that could be covered by the current innocent spouse provisions

in the Internal Revenue Code. The innocent spouse provisions cover

certain taxpayers who are assessed additional taxes of more than $500

after they file a “married, filing joint” tax return. Additional tax

assessments generally result from an IRS audit or from underreported

income detected in IRS’ underreporter program. We used tax year 1992

audit and underreporter results to estimate the potential innocent spouse

universe because that was the latest tax year for which most tax

assessments had been completed.

Estimated Number of

Innocent Spouse

Cases That Could

Result From an Audit

To determine the number of married couples filing joint returns that had

subsequent audit assessments, we used IRS’ Audit Information

Management System (AIMS) database of tax year 1992 audit cases that were

closed during fiscal years 1993, 1994, 1995, and the first 9 months of fiscal

year 1996. The AIMS data showed that for tax year 1992, 441,224 “married,

filing joint” returns were audited and closed by IRS’ Examination Division.

However, 190,393 of the 441,224 audits resulted in either no change to the

tax liability or in a refund. The remaining 250,831 audits resulted in

additional tax assessments. Table I.1 shows the number of tax year 1992

“married, filing joint” return audit cases with additional tax assessments

that were closed each fiscal year and shows whether the assessments

were for amounts of $500 and less or for more than $500.

Table I.1: Tax Year 1992 Closed Audit

Cases for “Married, Filing Joint”

Returns

Returns with tax assessments

Fiscal year closed $500 or less More than $500 Total

1993 1,277 2,604 3,881

1994 8,876 40,407 49,283

1995 17,426 138,395 155,821

1996 4,785 37,061 41,846

Total 32,364 218,467 250,831

Source: IRS’ AIMS file on tax year 1992 closed audit cases.

As shown in table I.1, the 218,467 taxpayers with tax assessments of more

than $500 potentially meet the eligibility criteria for innocent spouse relief.

Thus, this is the maximum number of taxpayers that could request

innocent spouse relief because of an audit assessment.

Page 30 GAO/GGD-97-34 Income Tax Liability
Appendix I 

Estimated Number of Potential Innocent

Spouse Cases

Estimated Number of

Innocent Spouse

Cases That Could

Result From the

Underreporter

Program

Of the 1.8 million tax year 1992 underreporter cases, 89 percent (about

1.6 million) were assessed additional taxes in fiscal year 1995. The

remaining 11 percent (about 200,000 cases) were assessed additional taxes

in either 1994 or 1996.

Since almost 90 percent of 1992 underreporter cases were assessed in

1995, we estimated the number of potential tax year 1992 innocent spouse

cases by evaluating a stratified probability sample of 463 underreporter

cases assessed in 1995. Based on the tax year 1992 returns in this sample,

we estimated how many of the 1.6 million tax year 1992 returns assessed

in 1995 were “married, filing joint” returns and, of those, how many had

assessments under $500 and assessments of $500 or more. Although we

did not have data to make similar estimates for the 200,000 tax year 1992

returns assessed in 1994 and 1996, we assumed that the filing status and

assessed amounts for these returns would be similar to the returns in the

1995 sample where the assessments occurred either 2 years or 4 years

after the tax year. We could not directly test this assumption, but our

analysis of the data indicates that various characteristics of the returns,

such as the amount assessed and the complexity of the underreporting

problem, determined when IRS processed the case. We weighted the

sample of 463 underreporter cases to represent the number of 1992 tax

year returns processed in 1995 and other years and then estimated the

potential innocent spouse cases for tax year 1992. We accounted for the

stratified sample design and unequal weights for the sample cases when

calculating the sampling errors.

The point estimates and sampling errors for 1992 are given in table I.2.

Table I.2: Estimates of Tax Year 1992

Taxpayers Who Could Be Eligible for

Innocent Spouse Relief Based on

Underreporter Assessments

Data used to calculate underreporter cases

Point estimates and

sampling errors

Estimated number of tax year 1992 assessments for

“married, filing joint” returns

993,536 ± 150,469

Estimated number of tax year 1992 joint filer cases with

assessments of $500 or less

624,734 ± 151,703

Estimated number of tax year 1992 joint filer cases with

assessments of more than $500

368,802 ± 55,822

Source: GAO’s analysis of IRS’ underreporter data

Adding the tax year 1992 joint filer underreporter cases with tax

assessments of more than $500 in table I.2 to the 218,467 joint filer audit

cases in table I.1 results in an estimated potential universe of innocent

Page 31 GAO/GGD-97-34 Income Tax Liability
Appendix I 

Estimated Number of Potential Innocent

Spouse Cases

spouse cases of approximately 587,000 that is bounded by a confidence

interval of between 531,447 and 643,091 returns. Additional uncertainty

about this estimate comes from our previously mentioned assumption

about the characteristics of the 11 percent of the 1992 returns that were

not assessed in fiscal year 1995.

Estimated Number of

Married Taxpayers

Who Divorce Each

Year

To estimate the number of taxpayers who divorce each year, we obtained

data from the Bureau of the Census and the Department of Health and

Human Services. Census’ report, entitled Marital Status and Living

Arrangements: March 1993, shows that there were 114,602,000 married

individuals in the United States at that time. A Monthly Vital Statistics

Report, dated October 1995 and prepared by the National Center for

Health Statistics within the Department of Health and Human Services,

states that approximately 1,191,000 divorces were granted in the United

States in 1994. Therefore, an estimated 2,382,000 individuals who were

married in 1993 had divorced in 1994. Dividing this number of individuals

by the total number of married individuals in 1993 results in an annual

divorce rate of 2.0784 percent, which we have rounded to 2 percent for the

calculations in our study. To estimate how many of the potential innocent

spouse cases would involve divorced couples over a 3-year period, we

multiplied 583,410 by the annual divorce rate of 2 percent and then

multiplied by 3.

Page 32 GAO/GGD-97-34 Income Tax Liability
Appendix II 

Information on Problem Resolution Office

Innocent Spouse Cases

Cases Between

January and June 1996

As part of IRS’ efforts to address the problems of divorced and separated

taxpayers, the headquarters Problem Resolution Office asked the Problem

Resolution Offices at four district offices and one service center to identify

all cases where the taxpayer raised the issue of innocent spouse relief

between January and June 1996. The offices identified 51 cases and

forwarded them to headquarters, where we reviewed them.

Of the 51 cases, 20 were not innocent spouse cases—for example, the

taxpayer was actually an injured spouse13 or was requesting relief for

taxes reported as owed on the original return. Of the remaining 31 cases, 4

involved taxpayers who had already been granted innocent spouse relief

but IRS had not correctly transferred the tax liability to the culpable

spouse. We did not include these cases since the files contained

information only on the processing problem, not the innocent spouse

issues. Table II.1 describes the characteristics of the remaining 27 cases.

Table II.1: Characteristics of Problem

Resolution Cases

Characteristic Average Range

Number of

cases with

dataa

Years elapsedb 7 years 2 years to

17 years

27

Amount of assessment $12,000 $900 to $50,000 23

Annual income $37,000 $7,000 to

$77,000

13

aThe Problem Resolution Office case files did not always include all these data .

bYears elapsed between the tax year assessed and the taxpayer’s contact with the Problem

Resolution Office.

Source: IRS’ Problem Resolution Office case files.

For the 24 cases where we could find data, all of the taxpayers began

requesting help because of collection activity, such as having their wages

levied by IRS. For the 24 cases where we could determine marital status, 20

taxpayers were divorced and 4 were separated. For the 21 cases where a

decision had been reached, IRS granted relief in 10 of the cases.

Case Histories The following cases histories illustrate some of the issues involved in

innocent spouse cases.

13Injured spouses are joint filers whose joint refunds have been seized to pay certain of their spouses’

nontax debts, such as past-due child or spousal support or a federal loan.

Page 33 GAO/GGD-97-34 Income Tax Liability
Appendix II 

Information on Problem Resolution Office

Innocent Spouse Cases

Confusion Over

Procedures and

Documenting Deductions

According to IRS’ records, a taxpayer learned of an assessment of over

$3,000 against a 1985 joint return when IRS levied her wages in 1992. The

assessment was generated primarily by her ex-husband’s disallowed

business and moving expenses, although he also had some unreported

income. The taxpayer contacted the Problem Resolution Office about

innocent spouse relief. Problem Resolution Office staff initially could not

explain how to apply for relief but provided assistance during subsequent

contacts. The taxpayer submitted documentation demonstrating that the

unreported income was generated by her husband and received relief for

about $200. According to an IRS official, she could not substantiate her

husband’s disallowed business expenses and was held liable for the

remainder of the tax.

Impact on New Spouses

and Original Return

A taxpayer whose ex-husband was a wanted fugitive had outstanding tax

liabilities because her ex-husband had failed to report income on their

joint return for 1 tax year and had not paid the tax reported for 2

subsequent tax years. The taxpayer remarried, and IRS placed liens against

her new husband’s property. IRS denied innocent spouse relief, in part

because the liability for 2 years was for taxes reported as due on the

original return. IRS did accept an Offer in Compromise for all 3 years.

Relief on Original Return

and Knowledge Test

In 1995, a taxpayer wrote to IRS to protest a balance due on joint returns

for 3 tax years. The taxes were attributable to income derived from her

ex-husband’s fraudulent activities. In 1996, IRS informed the taxpayer she

was not eligible for innocent spouse relief for 2 tax years because these

balances were for taxes reported as due on the original returns but not

paid when the returns were filed. However, IRS staff informed the taxpayer

they would consider innocent spouse relief for 1 year if the taxpayer could

demonstrate she had no knowledge of the unreported income.

IRS denied her request for innocent spouse relief because she could not

meet the knowledge test. Subsequently, she submitted third-party

statements that she did not live a lavish or enhanced lifestyle as well as

copies of police records on her ex-husband’s arrest and trial. IRS eventually

granted innocent spouse relief for that 1 year.

Knowledge Test A taxpayer learned of an assessment of over $12,000 on a joint 1991 return

when IRS levied her wages. The couple had legally separated and sold their

residence. Although she had reinvested her half of the capital gain on the

Page 34 GAO/GGD-97-34 Income Tax Liability
Appendix II 

Information on Problem Resolution Office

Innocent Spouse Cases

sale, her ex-husband had not done so within the 24 months required to

defer taxes. IRS denied innocent spouse relief because the taxpayer could

not meet the knowledge test. According to IRS, she knew of the possibility

of the additional tax when she signed the return.

Knowledge Test, Divorce

Decree, Dollar Threshold

A taxpayer learned of an assessment of about $1,200 on joint returns for 2

years when IRS seized her 1995 tax refund. The assessment was generated

by her ex-husband’s unreported income. The taxpayer argued that the

couple had maintained separate checking and savings accounts, and

therefore she did not know of the unreported income. Furthermore, the

divorce decree specified that she would assume outstanding credit card

debts and her ex-husband would be responsible for all other debts

incurred during the marriage. IRS denied innocent spouse relief for 1 year

because the assessment for that year was less than the $500 threshold. IRS

denied innocent spouse relief for the other year because the taxpayer did

not meet the knowledge requirement. Because the unreported income was

more than 75 percent of the ex-husband’s total income, IRS staff believe

she should have been aware of the income earned even though the

spouses had separate accounts.

Dollar Thresholds A taxpayer was assessed over $3,000 on joint returns filed in 4 tax years

generated by her husband’s disallowed deductions for gambling losses.

She was denied innocent spouse relief for 1 year because the assessment

for that year was less than the $500 threshold. She was denied innocent

spouse relief for the other 3 years because the assessment in each of those

years was less than 25 percent of her adjusted gross income.

Page 35 GAO/GGD-97-34 Income Tax Liability
Appendix III 

State Efforts to Address Joint and Several

Liability Issues

We contacted the state tax agencies to discuss how they handle various

issues surrounding joint and several liability when administering the state

income tax system. Seven states—Alaska, Florida, Nevada, South Dakota,

Texas, Washington, and Wyoming—do not tax personal income. Since the

tax agencies for these states do not administer any joint income tax

returns, we excluded them from our review. The remaining 43 states and

the District of Columbia do administer joint returns; however 2

states—New Hampshire and Tennessee—tax only interest and dividends.

Table III.1 provides information by state on the type of liability standard

the states apply to joint returns, the type of innocent spouse relief they

administer, and whether they are bound by divorce decrees.

Table III.1: State Liability Standards, Innocent Spouse Provisions, and Use of Divorce Decreesa

State

Joint return with

proportionate liability

Innocent spouse relief

based on Internal

Revenue Code

Less restrictive

innocent spouse relief

Bound by divorce

decrees

Alabama X

Arizona X

Arkansas

California X X

Colorado

Connecticut

Delaware X

District of Columbia X

Georgia X

Hawaii X

Idaho X

Illinois X

Indiana

Iowa X

Kansas

Kentucky X

Louisiana X

Maine X

Maryland X

Massachusetts X

Michigan X

Minnesota X

Mississippi

(continued)

Page 36 GAO/GGD-97-34 Income Tax Liability
Appendix III 

State Efforts to Address Joint and Several

Liability Issues

State

Joint return with

proportionate liability

Innocent spouse relief

based on Internal

Revenue Code

Less restrictive

innocent spouse relief

Bound by divorce

decrees

Missouri

Montana

Nebraska X

New Hampshire

New Jersey

New Mexico

New York X

North Carolina X

North Dakota X

Ohio

Oklahoma X

Oregon X

Pennsylvania

Rhode Island

South Carolina X

Tennessee

Utah X

Vermont

Virginia

West Virginia

Wisconsin X X

Total 1 18 6 3

aAlaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not tax personal

income and we excluded them from our review.

Page 37 GAO/GGD-97-34 Income Tax Liability
Appendix IV 

Estimated Costs for Processing Separate or

Modified Joint Returns

This appendix describes how we estimated the increased

returns-processing costs IRS would face if a proportionate liability standard

were administered by either (1) eliminating joint returns and requiring all

taxpayers to file separately; or (2) retaining joint returns but modifying

them so that each spouse’s income, deductions, and credits are reported in

separate columns.

Estimated Cost of

Processing Separate

Returns

To estimate the cost of processing up to 48 million additional returns, we

determined the distribution of the returns among the standard forms 1040,

1040A, and 1040PC in the 1992 Statistics of Income data. We then

estimated the cost of processing these returns using IRS’ Document 6746,

Cost Estimate Reference for Service Center Returns Processing for Fiscal

Year 1994. The calculation is shown in table IV.1.

Table IV.1: Estimated Cost of

Processing an Additional 48 Million

Tax Returns

Type of return

Number

(thousands)

Returns

processing cost

per thousand Cost

1040 37,802 $4,231.89 $159,973,906

1040A 8,092 3,690.48 29,863,364

1040PC 2,126 4,231.89 8,996,998

Total $198,834,268

Source: IRS’ 1992 SOI data and Document 6746, Cost Estimate References for Service Center

Returns Processing for Fiscal Year 1994.

Estimated Cost of

Processing Modified

Returns

To estimate the additional data entry costs for 48 million tax returns if the

returns were modified to show two income streams, we also used the

distribution of the returns among the standard forms 1040, 1040A, and

1049PC in the 1992 Statistics of Income data and IRS’ Cost Estimate

Reference for Service Center Returns Processing Fiscal Year 1994. The

calculation is shown in table IV.2.

Table IV.2: Estimated Additional Data

Entry Costs for Modified Joint Returns

Type of return

Number

(thousands)

Data entry cost

per thousand Cost

1040 37,802 $412.64 $15,598,617

1040A 8,092 263.54 2,132,566

1040PC 2,126 412.64 877,273

Total $18,608,456

Source: IRS’ 1992 SOI data and Document 6746, Cost Estimate References for Service Center

Returns Processing for Fiscal Year 1994.

Page 38 GAO/GGD-97-34 Income Tax Liability
Appendix V 

Distribution of Joint, Separate, and

Unknown Income for 1992 Joint Income Tax

Returns

The extent to which adopting a proportionate liability standard would

create an administrative burden for IRS depends partly on how easily IRS

could use an automated reporting system to allocate income and mortgage

interest payments between the two spouses. We reviewed a stratified

probability sample of 200 joint tax returns selected from IRS’ 1992 Statistics

of Income database to determine how much income was reported

separately for each spouse or jointly for the married couple. We projected

the results to the universe of 48 million couples who filed using the

“married, filing jointly” status at a 95 percent confidence level.

Of all the income in our sample, 77 percent was reported separately. About

2 percent of the income was reported as joint income, and we could not

determine whether the income was separate or joint for 12 percent. As

shown in table V.1, some types of income were generally reported

separately. For example, IRA distributions and unemployment

compensation were always reported separately, as was most farm income

(Schedule F). As a result, IRS would have little difficulty allocating this

income under a proportionate liability standard.

In contrast, state and local tax refunds are generally reported in both

spouses’ names. As a result, IRS could have difficulty allocating this income

between the two taxpayers.

We had difficulty determining whether other income categories were

separate or joint. For example, we generally could not determine which

taxpayer earned the profit or loss reported on Schedule E, supplemental

net gains or losses, or net operating losses.

Page 39 GAO/GGD-97-34 Income Tax Liability
Appendix V 

Distribution of Joint, Separate, and

Unknown Income for 1992 Joint Income Tax

Returns

Table V.1: Percentage of Income Reported Jointly, Separately, or Could Not Determine

Income source Joint income Separate income

Could not

determine Totala

Wages, salaries, tips 0% 96±2 % 4±2% 100%

Taxable interest income 24±10 36±12 40±17 100

Tax-exempt interest income 0 0 100 100

Dividend income 26±17 68±17 5±3 100

Taxable state and local tax refunds 82±15 4±4 15±13 100

Schedule C Net Income or Loss 0 82±29 18±29 100

Supplemental net gains or losses 0 0 100±.1 100

Taxable IRA distributions 0 100 0 100

Taxable pensions and annuities 0 100±.1 0 100

Schedule E Profit or Loss 9±14 4±5 87±16 100

Schedule F Profit or Loss 0 97±5 3±5 100

Unemployment compensation 0 100 0 100

Taxable Social Security benefits 0 83±21 17±21 100

Net operating loss 0 0 100 100

aRows may not total due to rounding.

Source: IRS, 1992 Statistics of Income database.

Page 40 GAO/GGD-97-34 Income Tax Liability
Appendix VI 

Comments From the Internal Revenue

Service

Page 41 GAO/GGD-97-34 Income Tax Liability
Appendix VI 

Comments From the Internal Revenue

Service

Page 42 GAO/GGD-97-34 Income Tax Liability
Appendix VII 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Ralph Block, Assistant Director, Tax Policy and Administration Issues

Nancy Peters, Assignment Manager

Elizabeth Scullin, Communications Analyst

San Francisco/Seattle

Field Office

Jack Erlan, Evaluator-in-Charge

Jonda Van Pelt, Senior Evaluator

(268711) Page 43 GAO/GGD-97-34 Income Tax Liability
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