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 . 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 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. 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 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. 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 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,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 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. 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.