Under tax law, married couples who file joint tax returns are treated as a single unit, which means that each spouse becomes individually responsible for paying the entire amount of the tax associated with his or her joint return. Accordingly, an “innocent spouse” can be held liable for tax deficiencies assessed after a joint return was filed, even if those liabilities were solely attributable to the actions of the other spouse. However, if certain conditions are met, the innocent spouse may be able to obtain relief from the tax liability. Prior to the Restructuring Act, relief was available to taxpayers but under rather restrictive conditions, such as that certain dollar thresholds for tax underpayments first be met. The Restructuring Act revised the conditions for obtaining innocent spouse relief to make it easier for taxpayers to qualify. The act liberalized the former conditions and added new conditions. Simply stated, the three basic provisions related to innocent spouse relief are as follows: When the innocent spouse had no knowledge that there was an understatement of tax attributable to erroneous items of the other individual filing the joint return, and considering all facts and circumstances, it would be unfair for IRS to hold the innocent spouse liable for the tax. When the innocent spouse otherwise qualifies, he or she may request that the tax deficiency from a jointly filed return be recalculated to include only items allocable to him- or herself. When the tax shown on a joint return was not paid with the return, the innocent spouse may obtain “equitable relief” if he or she did not know that the funds intended to pay the tax were not used for that purpose. Equitable relief is also available for understatements of tax for which relief under the above two conditions was not available. Each of these three conditions has different eligibility requirements and different types of relief. Appendix III describes in more detail the eligibility requirements for each condition and the factors that IRS is to weigh in deciding whether to grant or deny relief. Relief is generally available to taxpayers for liabilities arising after July 22, 1998, the date that the law was enacted, and for liabilities that arose before that date but remained unpaid as of that date. Limited data exist to determine the trend in innocent spouse workload immediately following passage of the Restructuring Act. IRS did not systematically track innocent spouse cases until March 1999, about 8 months after the act was passed. Prior to the Restructuring Act, IRS administered innocent spouse relief as part of its process for examining tax returns and did not keep statistics on the number of cases in which innocent spouse relief was requested or on the disposition of those requests. Nevertheless, according to IRS, because taxpayers were anticipating passage of the Restructuring Act, innocent spouse requests increased from a few cases to about 750 cases in each of the 4 months leading up to the act. During fiscal year 2000, it received, on average, 4,800 cases per month. IRS processes innocent spouse cases on the basis of proposed regulations issued in January 2001, which set forth the basic guidelines that its examiners are to use in evaluating taxpayers’ cases to determine whether to grant or deny relief. IRS’s Wage and Investment (W&I) Division is responsible for managing this program. Under procedures adopted in fiscal year 2001, virtually all innocent spouse cases are to be processed by correspondence at IRS’s Centralized Innocent Spouse Operation (Cincinnati processing site) in Covington, Kentucky. Generally, only those cases needing face-to-face contact or that arise in the field are to be handled by field staff, generally tax compliance officers and revenue agents in IRS’s Small Business/Self-Employed (SB/SE) Division. As discussed later in this report, IRS is phasing in new W&I field staff to work cases needing face-to-face contact with taxpayers. Staff at the Cincinnati processing site screen the incoming cases to determine whether they meet the basic eligibility requirements for further processing. These requirements include, among other things, verifying that a joint tax return was filed, that an outstanding tax liability exists, and that the request is for the appropriate tax year. Any request that does not meet the basic requirements is to be judged ineligible for further review and closed through written notification to the taxpayer of the reasons for IRS’s decision. Any case that meets the basic eligibility requirements is to be assigned to an examiner to further review the merits of the taxpayer’s request for relief. IRS is required by law to attempt to contact the other taxpayer who signed the joint tax return, to give him or her an opportunity to participate in the case. IRS generally allows 30 days for the nonrequesting spouse to respond. If a taxpayer files a claim for innocent spouse relief covering more than one tax period or year, IRS evaluates the merits of the claim for each tax year individually to determine whether relief should be granted. Therefore, the claim for each tax year is counted as a separate case. Based on the merits of an individual claim, IRS grants a taxpayer full relief, partial relief, or no relief. The examiners evaluate the facts and circumstances of each case and ultimately decide whether full, partial, or no relief should be granted. IRS is required by the Restructuring Act to notify the requesting spouse of its decision on each case and to inform him or her of the right to file an appeal with IRS’s Office of Appeals within 30 days. If the taxpayer does not file an appeal with IRS, or after the appeal is settled, IRS is to send a final determination letter to the requesting spouse and, as required by law, advise the individual of his or her right to appeal IRS’s decision to a federal court within 90 days. IRS’s decision on a case becomes final after the taxpayer exhausts all rights to an IRS appeal or a court review or waives these rights and accepts IRS’s decision. At that time, IRS is required to notify the nonrequesting spouse of the final result. To close a case after relief is finally approved, IRS must separate and transfer taxes from the taxpayers’ joint tax account in the amount of the approved relief. IRS procedures require that its staff establish a separate, individual tax account for the taxpayer who was judged responsible for the tax liability and transfer the tax liability to that account. Any joint tax liability that is not part of the relief granted remains a liability of both taxpayers that IRS may collect from either. To assess IRS’s efforts to ensure that innocent spouse cases were being processed in a timely, accurate, and consistent manner, we reviewed W&I and SB/SE planning documents, ISTS data on the program’s performance, and data from the innocent spouse quality review program, which analyzes samples of closed cases for adherence to procedures and accuracy of decisions. We interviewed IRS’s innocent spouse project manager and staff to obtain information on how the program was managed, and we obtained relevant documentation on the program, including its procedures, policies, and guidance. To further assess the management of the program, we relied on our past reports on managing organizational performance, IRS’s guidance regarding performance management, and other management literature, including the Government Performance and Results Act. We reviewed reports by TIGTA and IRS’s taxpayer advocate that addressed innocent spouse management issues. We also analyzed the assumptions that IRS used in projecting inventory and staffing levels. To determine whether IRS’s efforts to process cases timely, accurately, and consistently were resulting in changes in program performance, we also obtained and analyzed ISTS data from March 1999 to December 2001 regarding the number of innocent spouse cases that IRS received and resolved and their average case-processing times. We performed limited accuracy checks on the ISTS database. In September 2001, TIGTA recommended that IRS strengthen its controls over data in the ISTS. IRS subsequently implemented corrective actions to help ensure the accuracy and validity of the ISTS data, including correcting data from prior years. The database that we used reflected these corrections. We did not test the reliability of the other IRS databases used in our analysis—the Examination Case Reporting System and the Work Planning and Control System—that maintain data on staff hours applied to examination programs, including innocent spouse case processing. We analyzed the direct staff hours that IRS staff charged to conduct case evaluations for fiscal years 2000 and 2001. IRS did not have complete information for earlier periods. To assess the adequacy of IRS’s procedures to transfer liabilities between taxpayers when relief was granted, we reviewed the procedures and related guidance such as training materials and policy memoranda. We discussed the procedures and related guidance with the innocent spouse project manager, managers at the Cincinnati processing site, and Customer Account Services staff who are responsible for overseeing the process of transferring tax liabilities between tax accounts. We also compared our published guidance on internal control management for federal agencies with IRS’s procedures. We observed the process that IRS had in place at the Cincinnati processing site for transferring tax liabilities from taxpayers’ joint accounts to their individual accounts. We discussed IRS’s procedures with taxpayer advocate service staff to determine whether they received any complaints from taxpayers that IRS had incorrectly transferred liabilities in their innocent spouse cases. To assess IRS’s efforts to evaluate the usefulness of its Innocent Spouse Program Web site to taxpayers, we reviewed guidance from selected academic and industry experts on assessing Web sites and we interviewed IRS’s Electronic Tax Administration and Innocent Spouse Program officials. We also examined IRS’s Innocent Spouse Web site to determine the type and content of information available to the taxpayers. To determine the number and disposition of innocent spouse cases filed in U.S. federal courts, we obtained information from staff at Treasury’s Office of Chief Counsel that identified court decisions on innocent spouse cases compiled from the LexisNexis database for the period June 1996 to June 2001. The compilation excluded those cases that addressed only procedural issues such as whether a court had jurisdiction to hear the case.