Volume 25 Issue 3 --May/June 2013
Many tax practitioners are familiar with the
concept of innocent spouse relief, where one spouse seeks relief
from a joint tax liability with his or her spouse. Not so many practitioners are familiar
with the concept of injured spouse relief, which involves refunds on joint
returns where one, but not both, of the joint return filers is subject
to a legally enforceable claim for which a refund offset is permitted
under IRC § 6402.
Despite the similarity in the terminology, “injured
spouse”
relief and “innocent spouse” relief are entirely separate and distinct
concepts.
Under IRC § 6402, the IRS has the right to
reduce tax refunds by the amount of certain debts that a taxpayer owes.
These debts include past due debts owed to other federal agencies, past
due child support, and past due legally enforceable state income tax
obligations.
But what happens if the refund is from a joint
return and only one spouse is subject to these debts?
Suppose for example, that Bob and Mary file a
joint return and are entitled to a substantial refund. Bob, however,
has a legally enforceable past due child support obligation growing out
of his first marriage to Wilma.
Under procedures set forth in regulations under
Title 31 of the Code of Federal Regulations, 31 CFR § 285.2, Bob’s past due child
support obligation can become an offset against Bob and Mary’s tax
refund. But only Bob is liable for the child support. What about Mary’s
interest in the refund?
If the obligation giving rise to the tax refund
offset is joint, then the entire refund is subject to offset. If
the debt is not joint but is only enforceable against one spouse (Bob
here), then the other spouse (Mary here) is called the “injured spouse” by the IRS because she does not owe the
obligation that created the offset. In that case, Mary as the injured spouse can file a claim
for her share of the refund, not reduced by the offset attributable to
the other spouse’s obligation.
The IRS has long ruled that when
spouses file joint income tax returns, each spouse has a
separate interest in the jointly reported income and in any overpayment
or refund. Hence, the injured spouse is entitled to receive his or her
share of the refund even if the liable spouse’s
entire refund is offset.
Stating this principle is much simpler than
applying it.
First, the injured spouse must file a claim to
his or her share of the refund. Form 8379 is used for that purpose.
In general, it is necessary to determine the
liable spouse's interest in the overpayment, the amount that can be
offset for the liable spouse's debt, and the amount to be refunded to
the nonliable (injured) spouse. The allocation process
involves several steps and varies with the type of claim
giving rise to the offset and state law.
The injured spouse’s share of the overpayment
is computed by subtracting that spouse’s share of the joint liability
from that spouse’s contribution of credits toward the joint liability.
Each spouse’s share of the tax liability is
determined as if they had filed separate returns, with the income and
deductions allocated between the two spouses. Next the credits
generating the overpayment (such as withholding, estimated tax
payments, and other credits) must be allocated to each spouse’s
separate tax liability.
Suppose that the joint refund is $1,500 and
that Mary’s share of the credits is $7,000 while her separate tax
liability is $6,000. Mary’s refund would be $1,000 ($7,000—$6,000), and
Bob’s share of the refund would be subject to offset.
Under no circumstances can an injured spouse be
refunded more than the amount of the joint overpayment. For
example, if Mary’s share of the credits in the foregoing example, was
$8,000, her refund would still be limited to $1,500 —
the amount of the overpayment on the joint return — not
the $2,000 difference between her share of the credits and her separate
tax liability.
In common law states, income and deductions are
allocated according to the legal owner of the item under state law. In
community property states, income and deductions related to community
property are split, but income and deduction items relating to separate
property will not be.
Sections of the Internal Revenue Manual
25.18.5.4 et seq. contain a number of detailed rules for
allocating various income, deduction, and credit items in community
property states. Indeed there are special rules for tax offsets in
Texas and in other community property states that allow creditors to
reach more than half the community property to satisfy the debts of one
spouse.
If you have questions about injured spouse
relief please call the Tax & Business Professionals.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.
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