Under the joint and several liability standard, 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. As a result, one spouse can be held liable for tax deficiencies assessed after a joint return was filed, even if the additional taxes were solely attributable to the income of the other spouse. Married couples can file separately and be held liable only for the taxes accruing from their own income, but couples who file this way may face a higher total tax bill than if they filed jointly. from the culpable spouse, it may seek to collect the taxes from the “innocent spouse.” However, the innocent spouse may obtain relief from the additional tax liability if certain conditions are met. The current innocent spouse provisions only apply to taxes assessed after the joint return was filed. The provisions do not apply to underpayments of the taxes reported on the joint return because any underpayments are expected to be known by both spouses signing the joint return. The provisions allow relief from the joint and several liability standard when the innocent spouse has filed a joint return with the culpable spouse; the innocent 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 certain income levels. If the innocent spouse has remarried, the new spouse’s income is included in this calculation whether or not they file a joint return. new husband’s property. IRS denied innocent spouse relief. This was in part because the liability was for taxes reported on the joint return rather than taxes assessed after the return was filed; that is, there was an underpayment. IRS did accept an Offer in Compromise for both years and for a third year where the ex-husband had failed to report income. In 1995, a taxpayer wrote to IRS to protest taxes due on 3 joint returns that 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. 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. 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 her ex-husband would be responsible for outstanding tax debts incurred during the marriage. IRS denied innocent spouse relief for 1 year because the additional tax 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 believed she should have been aware of the income earned even though the spouses had separate accounts. 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 additional tax assessment for that year was less than the $500 threshold. She was denied innocent spouse relief for the other 3 years because the additional tax assessment in each of those years was less than 25 percent of her adjusted gross income. programs. Of these 1.2 million returns, about 587,000 had additional tax assessments exceeding $500, which is the minimum dollar threshold required for innocent spouse relief. However, our estimate of 587,000 couples represents the maximum number of taxpayers potentially eligible for innocent spouse relief. This is more than would probably actually qualify. For instance, some couples were probably assessed additional taxes as a result of overstated deductions, credits, or basis, which have other dollar thresholds in addition to the $500 threshold. Further, some of the 587,000 couples may not have qualified for innocent spouse protection because they both 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. Since divorced taxpayers seek innocent spouse relief most frequently, 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 had additional tax assessments of more than $500. 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. The innocent spouse relief provisions are described in several IRS publications, but these publications do not provide any guidance on how to request relief. Furthermore, these publications are developed to help taxpayers prepare their returns, which is far in advance of the time that taxpayers might need information on innocent spouse relief. Moreover, the publications most directly related to the enforcement and collection procedures that apply when taxpayers are billed for their spouses’ taxes are totally silent about innocent spouse 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 indicates to us that IRS does not provide taxpayers with adequate guidance for seeking relief. Some IRS staff are as confused as taxpayers about how to request innocent spouse relief. The various IRS units we contacted took different approaches to providing relief. For example, two district offices granted relief using Offers in Compromise based on doubt as to liability, while staff at one service center routinely denied such requests as inappropriate. The current provisions may not ensure that taxpayers receive equitable relief. For example, the dollar thresholds represent eligibility criteria for relief based on income or the size of the liability. These criteria appear to be more related to an ability to pay or degree of hardship than to the innocence of the taxpayer. The logic behind the income thresholds is particularly cloudy because the potential innocent spouse’s income 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. 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, lower income taxpayers could be precluded from obtaining relief. We estimated that if the dollar thresholds were eliminated, the maximum number of couples filing tax year 1992 returns potentially eligible for innocent spouse relief would have been 1.2 million, which consist of all couples who were assessed additional taxes under IRS’ audit and underreporter programs. Also, under the current provisions, spouses can receive relief if deductions, credits, or basis have absolutely no basis in fact or law, but not if they are simply erroneous. The distinction between a deduction having no basis in fact or law 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 to incorporate more recent changes to the provisions. 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, determining whether a taxpayer’s lifestyle was significantly better because of the tax avoidance is fairly subjective and the courts have interpreted the criteria differently. One 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 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. The options are to (1) eliminate joint returns and require all taxpayers to file separately, (2) retain joint returns but modify them so that each spouse’s income and deductions are reported in separate columns (this is called front-end proportionality), and (3) retain the current joint return requirements but apply proportionate liability only in cases where there are delinquent taxes or subsequent tax assessments (this is called back-end proportionality). We evaluated the potential effects of these options on IRS’ tax administration processes and taxpayers’ burden. Table 1 shows the pros and cons of the three options for taxpayers and IRS. Statement Innocent Spouse: Alternatives for Improving Innocent Spouse Relief If divorced, individual liability is more clearly established. If divorced, individual liability is more clearly established. No additional paperwork burden.