If Louisiana spouses are jointly liable for federal taxes because they filed a joint tax return, the IRS may collect taxes from either spouse’s separate property and from any of their community property.1

In some cases, only one spouse may owe the tax liability. This situation may arise when one spouse incurred a pre-marital tax debt, the spouses did not file a tax return, the spouses filed separate returns, one spouse qualified for innocent spouse relief, or one spouse incurs self-employment tax liability.

The IRS may collect a liable spouse’s pre-marital tax debt from all of the liable spouse’s separate property. Because Louisiana is a 100% community property state for tax collection purposes, the IRS can collect a liable spouse’s pre-marital or post-marital tax debt from 100% of the community property.2  Currently, a spouse’s wages, even if the spouses are separated, are community property in Louisiana and may be levied by the IRS to collect a federal tax debt. However, a levy against a non-liable spouse’s wage is not a “continuous levy” under I.R.C. § 6331(e), and so, a separate levy must be issued for each paycheck. A non-liable spouse may also claim the exemptions for levied wages.3

Jointly owned property can be seized by the IRS. However, the IRS must compensate the nondebtor for the value of the nondebtor’s share of the community asset being seized.4  District courts have some discretion under I.R.C. § 7403 to refuse to order a foreclosure sale if the IRS holds a lien on only part of the house.5

• 1I.R.M. 25.18.4.1.
• 2Rev. Rul. 2004-72, I.R.B. 2004-30; I.R.M. 25.18.4.6. In states that are “50% community property” states, the IRS may be limited to collection against 50% of the community property.
• 3I.R.M. 25.18.4.3.
• 4United States v. Rodgers, 461 U.S. 677, 699 (1983); I.R.M. § 25.18.4.1.
• 5Rodgers, 461 U.S. 677; United States v. Jensen, 785 F. Supp. 922 (D. Utah 1992) (harm to terminally ill nondebtor outweighed delay to IRS); United States v. Jones, 877 F. Supp. 907 (D.N.J. 1995) (nondebtor wife kept house in return for paying one-half of the imputed rental value of the property to IRS).

Under I.R.C. § 6402, the IRS may offset tax refunds to satisfy certain unpaid debts. Thus, a taxpayer’s tax refund may be seized to pay delinquent child support obligations, state taxes, or past due federal debts. Federal debts can include Social Security overpayments, past due Small Business Administration loans, or past due federally insured education loans. Typically, the IRS seizes part or all of the tax refund to pay the qualified creditor that invoked the § 6402 offset procedures.

In Louisiana, the IRS may seize or offset 100% of the spouses’ tax refund to collect one spouse’s unpaid federal tax debt.1  However, the rights of other creditors to an offset of a non-liable spouse’s tax refunds are more limited. These creditors may not offset against the non-liable spouse’s share of community property.2  However, if a state tax refund is community property, the State of Louisiana may offset the refund to satisfy one spouse’s separate debt.3

If a joint return was filed and both spouses had income and tax payments on the return, the non-liable spouse may request the portion of the tax refund attributable to that spouse by filing a Form 8379. For example, if the non-liable spouse worked and had income taxes withheld from the paycheck, that spouse is permitted to obtain the portion of the refund attributable to the withheld payments. This form should be filed along with the Form 1040 but can also be submitted later.

Louisiana residents may apply for injured spouse relief if they were not required to pay the past due amount that was offset by the IRS at the request of a qualified creditor. Overpayments are allocated according to state law.

• 1See Rev. Rul. 2004-72, I.R.B. 2004-30.
• 2I.R.M. 25.18.5.8.
• 3La. C.C. art. 2345 (a spouse’s separate obligation may be satisfied from community property during the community); Price v. Secretary, 95-887 (La. App. 3 Cir. 12/6/95), 664 So. 2d 802 (wife’s wages garnished to satisfy husband’s separate tax obligation). In Louisiana, child support that accrues during a second marriage is a community obligation. Gill v. Gill, 39,406-CA (La. App. 2 Cir. 3/9/05), 895 So. 2d 807. The State of Louisiana will offset a community tax refund to collect child support owed by one spouse for children of a prior marriage, whether it accrues during the second marriage or is for arrearages that pre-date the second marriage.

Ownership of tax refunds is governed by state law.1  Because Louisiana is a community property state, division of a tax refund may require an analysis of the community and separate nature of the underlying income earned. In Louisiana, the classification of property as community or separate is fixed at the time of acquisition.2

For most low-income taxpayers, the Earned Income Credit (EIC) accounts for most of their tax refund. The portion of the refund attributable to the EIC is the separate property of the spouse who was entitled to the credit regardless of state law concerning the classification of income as community or separate property.3  Because the spouse with the earned income and/or the right to claim a dependent is entitled to the credit, the other spouse does not have a community property interest in any portion of the EIC

• 1See, e.g., Rev. Rul. 2004-72, I.R.B. 2004-30; Rev. Rul. 74-611, 1974-2 C.B. 399; see also Gray v. United States, 553 F.3d 410 (5th Cir. 2008) (analyzing interest in tax refund under Texas community property laws). Note that the allocation of tax refunds in non-community property states may involve an analysis of the spouse’s earnings, payments, and separate tax liabilities. See, e.g., I.R.M. 25.18.5.3; Rev. Rul. 80-7, 1980-1 C.B. 296; In re Palmer, 449 B.R. 621 (Bankr. D. Mont. 2011).
• 2Robinson v. Robinson, 1999-3097 (La. 1/17/01), 778 So.2d 1105. By comparison, stimulus refund payments may be owned 50-50 without regard for the parties’ respective incomes. See, e.g., In re Thompson, 396 B.R. 5 (Bankr. N.D. Ind. 2008).
• 3Rev. Rul. 87-52, 1987-1 C.B. 347.

If a married couple files separate tax returns in a community property state, each spouse must report one-half of the community income.1  In a community property state, each spouse should be limited to 50% of any cancellation of debt income claimed by the IRS.2

If the spouses have physically separated but not yet divorced, the higher-income spouse will typically benefit from this reporting requirement. A lower-income spouse may obtain relief by showing that one of 4 exceptions applies:

• The spouses lived apart for the entire year, filed separate returns, and did not transfer more than a de minimis amount of earned income between them.3
• The taxpayer was not notified by the other spouse of the nature and amount of the income before the due date (including extensions) for the filing of the taxpayer’s return, and the spouse acted as if solely entitled to the income.4  Only the IRS may invoke this exception.5
• Traditional innocent spouse relief6  from community property laws under I.R.C. § 66(c) for an item of community income if (a) the requesting spouse did not file a joint return for the tax year; (b) the income item omitted from the gross income of the requesting spouse’s income would be treated as the other spouse’s income under I.R.C. § 879(a);7  (c) the requesting spouse did not know of, and had no reason to know of, the item of community income; and (d) taking into account all of the facts and circumstances, it is inequitable to include the item of community income in the requesting spouse’s individual income.
• Equitable relief under the “flush language” of I.R.C. § 66(c) for spouses who don’t meet the requirements for traditional innocent spouse relief.8

Be aware that the time limitation for requesting traditional innocent spouse relief under I.R.C. § 66(c) is different from the time limitations for I.R.C. § 6015 innocent spouse relief or I.R.C. § 66(c) equitable innocent spouse relief.9  Traditional innocent spouse relief under I.R.C. § 66(c) must be requested no later than 6 months before the statute of limitation on assessment expires for the non-requesting spouse.10  By contrast, equitable innocent spouse relief under §66(c) must be claimed within 2 years of the first collection activity against the electing spouse.11

Some community property income may be excluded from a spouse’s income by other laws. For instance, a pension distribution in a community property state is usually considered community property and to be taxable income for both spouses. But spouses may have a state court judgment called a Qualified Domestic Relation Orders (QDRO). A QDRO establishes the non-employee spouse’s right to receive payments. Payments pursuant to a QDRO are taxable to non-employee spouse but not to the employee spouse, even when the employee spouse receives the distribution and turns the funds over to non-employee spouse.12  The employee spouse is not taxed on the non-employee spouse’s community property share of the IRA distribution.13  Similarly, this spouse would not be liable for the I.R.C. § 72(t) additional tax on an IRA distribution.14

• 1United States v. Mitchell, 403 U.S. 190, 196–97 (1971); Reg. § 1.66-1.
• 2Cf. Brickman v. Comm’r, T.C. Memo 1998-340.
• 3I.R.C. § 66(a); 26 C.F.R. § 1.66-2. I.R.C. § 66(a) relief is automatic if the requirements are met. For purposes of § 66(a), any amount of income transferred for the benefit of the spouses’ child is not treated as a transfer to the spouse. 26 C.F.R. § 1.66-2(c).
• 4I.R.C. § 66(b); 26 C.F.R. 1.66-3. The IRS may deny a spouse the federal income tax benefits of community property law on items of community income. Under the regulations, a spouse will not have acted as solely entitled if the income was “used or made available for the benefit of the marital community.” 26 C.F.R. § 1.66-3(a). It is not clear whether a small amount of funds paid for family support would bar the IRS from invoking I.R.C. § 66(b) against a taxpayer.
• 5I.R.C. § 66(b); Hardy v. Comm’r, 181 F.3d 1002 (9th Cir. 1999).
• 6If a married couple filed a joint return, I.R.C. § 6015 would govern requests for innocent spouse relief. I.R.C. § 66(c) does not apply to joint filers.
• 7The other spouse’s wages or income from a trade and business operated as a sole proprietorship are the most common examples of this type of income.
• 8See Rev. Proc. 2003-61, I.R.B. 2003-32; IRS Notice 2012-8. Note that the “absence of significant benefit” test is different for equitable relief under I.R.C. § 66(c) than for traditional relief under I.R.C. § 66(c)(4). See Felt v. Comm’r, T.C. Memo 2009-245. It is easier to meet the § 66(c) “absence of substantial benefit” test.
• 9For more complete discussion of innocent spouse relief, see Section 9.3.
• 1026 C.F.R. § 1.66-1(j).
• 11Rev. Proc. 2003-61, 2003-2 C.B. 296. Note that “collection activity” has a technical definition. See, e.g., McGee v. Comm’r, 123 T.C. 314 (2004).
• 12Powell v. Comm’r, 101 T.C. 489 (1993); see also Mitchell v. Comm’r, 131 T.C. No. 15 (2008) (QDRO distribution taxable to non-employee spouse in community property state). A different outcome may result when the employee spouse pays the non-employee spouse with the employee spouse’s separate wages rather than the pension distribution. Comm’r v. Dunkin, 500 F.2d 1065 (9th Cir. 2007).
• 13Bunny v. Comm’r, 114 T.C. 259, 262 (2000).
• 14Morris v. Comm’r, T.C. Memo 2002-17.

Net self-employment income is community property. Generally, community property rules will govern regular income tax liability and require the non-earning spouse to include one-half of the earning spouse’s income in any separate tax return. However, even in a community property state, self-employment income will be allocated entirely to the self-employed spouse for the purposes of self-employment tax.1  In other words, community property law is disregarded for the purposes of calculating self-employment taxes. This rule can provide significant tax relief for the non-earning spouse because self-employment tax is often about 60% of the tax liability faced by low-income taxpayers.

• 1I.R.C. § 1402 (a)(5); 26 C.F.R. § 1.1402 (a)(8); IRM § 25.18.2.2; Charlton v. Comm’r, 114 T.C. 333; Davis v. Comm’r, T.C. Memo 1989-46; Gilliam v. Comm’r, 60 F. App’x 720 (10th Cir. 2003).

Both federal and Louisiana law have provisions that relieve innocent spouses from tax deficiencies or understatements. You should be able to identify when a client may have a potential innocent spouse relief claim. Appropriate claims should be filed with both the IRS and the Louisiana Department of Revenue. Innocent spouse relief often arises in domestic violence cases.

Innocent spouse relief cases are complex.1  The IRS has a spousal tax relief eligibility explorer on its web page to assist with evaluating eligibility for innocent spouse relief. It is recommended that these cases be referred to a Low-Income Taxpayer Clinic or other tax law specialist.

• 1For a comprehensive discussion of § 6015 innocent spouse relief, see Robert B. Nadler, A Practitioner’s Guide to Innocent Spouse Relief: Proven Strategies for Winning Section 6015 Tax Cases (2011). This manual is currently out of print but is available from the law library of the Texas A&M University School of Law. The manual is free to LITC attorneys and to private practitioners for a small fee.

Section 6015(b) innocent spouse relief can’t be used for an underpayment, which occurs when the tax is admitted to be due on the return, but it is not paid at the time of filing.1  But, innocent spouse relief is appropriate for an understatement of tax, i.e., the offending spouse filed a return with incomplete or false information. Generally, if the other spouse did not know or have reason to know about the unreported income or erroneous items and did not receive benefits from the unreported income or erroneous items, that spouse may be eligible for innocent spouse relief. A single return may have a mixture of underpayment and understatement issues.

If the requesting spouse knew or had reason to know of the understatement, innocent spouse relief is not available.2  The reason-to-know standard considers all the facts and circumstances (e.g., the nature of the item, the requesting spouse’s education and business background, the extent of that spouse’s participation) and inquires whether a reasonable person in similar circumstances would have known of the understatement.3  The existence of domestic violence in the marriage can be an important factor; in these situations, an abuser often controls the household’s finances and an abused spouse may have been afraid to inquire about these matters.

• 1Hopkins v. Comm’r, 121 T.C. 73, 88 (2003).
• 226 C.F.R. § 1.6015-2(a)(3).
• 326 C.F.R. § 1.6015-2(c).

A separate tax liability election under § 6015(c) is available for a taxpayer who, at the time of election, is no longer married to or has been living apart for at least 12 months from the person with whom the taxpayer originally filed a joint return.

To elect this relief, a taxpayer must prove that a portion of the understatement was attributable to the other spouse. A taxpayer can’t use § 6015(c) for an underpayment of tax liability.1  The determination of separate liability is made without regard to community property rights. Thus, taxes are based on the electing taxpayer’s own income as if the taxpayer had filed a separate married return. If the taxpayer had no income, the tax liability will be zero.

Taxpayers are often successful under § 6015(c). Relief is easier to obtain under § 6015(c) than under § 6105(b) because the IRS can only deny apportioned liability under § 6015(c) if it proves actual knowledge of an erroneous item, as distinguished from a mere “reason to know.”2

• 1Hopkins v. Comm’r, 121 T.C. 73, 88 (2003).
• 2Generally, the burden of proof is on the taxpayer for innocent spouse relief with the exception of the requirement that the IRS must prove actual knowledge to deny apportioned liability under § 6015(c). See, e.g., Culver v. Comm’r, 116 T.C. 189 (2001).

If relief is not available under the innocent spouse rule (§ 6015(b)) or the separate liability election (§ 6015(c)), the IRS may relieve an individual of liability if it would be inequitable to hold the individual liable for any unpaid tax or deficiency.1   The IRS automatically considers a taxpayer for equitable relief if innocent spouse and separate liability relief are denied.

Low-income clients, particularly survivors of domestic violence, often qualify for equitable relief under § 6015(f) or § 66(c).2  I.R.C. § 66(c) provides equitable relief in community property states where a joint return was not filed; I.R.C. § 6015(f) applies if a joint return was filed (even in community property states). Unlike I.R.C. § 6015(b) and (c), § 6015(f) and § 66(c) permit equitable relief from an underpayment of income tax. The requesting spouse may even be able to obtain a refund in some circumstances.3

Under the requesting spouse must satisfy 7 threshold conditions for § 6015(f) relief.4  Conditions 1 and 2 don’t apply for a § 66(c) equitable relief request. These conditions are:

1. Filing a joint return
2. Denial of relief under § 6015(b) and (c)
3. Application within 2 years of first collection activity5
4. No transfer of assets as part of fraudulent scheme
5. No transfer of disqualified assets to the requesting spouse
6. Requesting spouse did not file or fail to file with fraudulent intent
7. Item resulting in deficiency or underpayment is attributable to non-requesting spouse unless (a) attribution is due to operation of community property laws and the item is only nominally owned by requesting spouse; (b) the non-requesting spouse misappropriated funds and the requesting spouse had no knowledge or reason to know of the misappropriation; or (c) abuse not amounting to duress led the requesting spouse not to challenge treatment of items.6

If a case involves an underpayment on a joint return, the IRS will ordinarily grant § 6015(f) equitable relief if the taxpayer meets the 3 “safe harbor” conditions in § 4.02 of Rev. Proc. 2003-61: marital status, no knowledge of underpayment, and economic hardship.7  In some cases, the marital status factor may be met even if the spouses lived separately in the same house.8  Equitable relief under § 4.02 is available to all joint return taxpayers with underpayments, including taxpayers in community property states.

If only partial relief is granted under § 4.02, a taxpayer may still be eligible for total relief under § 4.03.9  Equitable relief is available under § 4.03 for a “community property state” taxpayer who did not file a joint return, who requested relief under I.R.C. § 66(c), and who met the applicable threshold conditions of § 4.01, i.e., conditions 3 to 7. It is also available to a spouse who filed a joint return and met the § 4.01 threshold conditions, but did not qualify for “safe harbor” relief under § 4.02.

Under § 4.03, no single factor is determinative. All factors must be considered and weighed appropriately.10  The Tax Court now reviews IRS denials of § 6015(f) equitable relief under a de novo standard of review and a de novo scope of review.11 The Tax Court regularly reverses IRS denials of equitable relief. If the Tax Court finds that the IRS erred in denying equitable innocent spouse relief, it must decide the appropriate relief and may not remand the case to the IRS.12

• 1I.R.C. § 6015(f).
• 2For a sample analysis of § 6015(f) equitable innocent spouse relief, see Stephenson v. Comm’r, T.C. Memo 2011-16. For a sample analysis of § 66(c) equitable innocent spouse relief, see Bennett v. Comm’r, T.C. Summ. Op. 2005-84.
• 3See Rev. Proc. 2003-61, § 4.04; see also Washington v. Comm’r, 120 T.C. 137, 152–54 (2003).
• 4See Rev. Proc. 2003-61, § 4.01.
• 5The IRS has decided not to impose the 2-year time limit for § 6015(f) equitable relief claims. See Notice 2011-70, 2011-32 I.R.B. 135. However, the IRS has decided that that the Rev. Proc. 2003-61 time limits for § 66(c) equitable relief claims are invalid.
• 6For helpful discussion of the “abuse exception”, see Nihiser v. Comm’r, T.C. Memo 2008-135; Brown v. Comm’r, T.C. Summ. Op. 2008-121.
• 7Gonce v. Comm’r, T.C. Memo 2007-328.
• 8Nihiser v. Comm’r, T.C. Memo 2008-135.
• 9Cf. Bruen v. Comm’r, T.C. Memo 2009-249.
• 10Rosenthal v. Comm’r, T.C. Memo 2004-89.
• 11Porter v. Comm’r, 132 T.C. 2003 (2009).
• 12Friday v. Comm’r, 124 T.C. 220, 222 (2005); Nihiser v. Comm’r, T.C. Memo 2008-135.

The primary laws for innocent spouse relief from state taxes are La. R.S. 47:101(B)(7) and 47:1584.1  These laws are similar to the IRS rules for innocent spouse relief and are retroactive to all tax years. If possible, file the innocent spouse claim within two years of the first collection activity directed to the innocent spouse.2  Innocent spouses may also be relieved from suspension of driver’s licenses for failure to pay state taxes greater than $1,000.3

• 1Guidelines for filing state innocent spouse relief claims are found in Louisiana Department of Revenue Technical Advisory Memorandum 99-003.
• 2Although La. R.S. 47:101 establishes a 2-year limit for assertion of innocent spouse relief, La. R.S. 47:1584(B)(4) gives the Secretary authority to grant innocent spouse relief after the expiration of the two years.
• 3La. R.S. 47:296.