TAX TIP – INNOCENT SPOUSE RELIEF IN THE STATE OF CALIFORNIA
Both federal and California law provide relief for “innocent spouses” determined not to be responsible for taxes due on returns filed using a married filing status. The majority of innocent spouse cases involve joint returns filed by taxpayers who were married at the time the return was filed. Where a joint return is filed, both spouses are jointly and severally liable for any tax due and the government may collect the full amount due from either individual regardless of which spouse earned the underlying income. An innocent spouse determination renders the non-innocent spouse legally responsible for paying the full amount due and absolves the innocent spouse of liability. Traditional innocent spouse relief under federal and / or California law requires submission of a claim by the requesting spouse showing that he or she did not know of income underlying the liability, did not know of nonpayment of tax due, and / or should not be held responsible for the tax on equitable grounds. The government notifies the non-requesting spouse of the claim and provides that spouse an opportunity to oppose the claim before determining whether relief is appropriate based on all relevant facts and circumstances.
California provides an additional avenue for innocent spouse relief through its court system. A taxpayer seeking relief from state tax liability may obtain a court order modifying the debt and contractually shifting responsibility to the spouse who earned or controlled the income giving rise to the tax. Where the tax in question exceeds $7,500 or the joint return reports income greater than $150,000, the requesting spouse must obtain a “tax revision clearance certificate” from the Franchise Tax Board and file it with the court. Any order revising liability must separately state the income tax liabilities for the years at issue, and may only revise liability for an unpaid amount.
California tax liability may be contractually revised during and outside of divorce proceedings. Taxpayers in the midst of divorce proceedings may revise California tax liabilities through a Marital Settlement Agreement (“MSA”) or other contractual document. Where the above-mentioned requirements are satisfied, relief is automatic. A taxpayer who applies for innocent spouse relief outside of divorce proceedings, however, is subject to Franchise Tax Board discretion. The requesting spouse must show that at the time the return was filed, he or she did not know or have reason to know of the unpaid tax (or underlying income). The FTB contacts the non-requesting spouse to allow him / her to oppose the revision request, then performs a facts and circumstances analysis of the evidence presented to determine if it would be unfair to hold the requesting spouse responsible for the amount due. No automatic relief is available to taxpayers requesting relief outside of divorce proceedings; as such, it is advantageous for divorcing spouses to consider revising any California tax liability while divorce proceedings are ongoing.
If you have questions about innocent spouse relief, contact Hone Maxwell LLP for assistance today.