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Innocent Spouse Relief Denied for Wife Who Had Reason to Know of Husband's Failure to Pay Taxes

(Parker Tax Publishing August 2017)

The Tax Court denied innocent spouse relief to a wife whose husband took responsibility for filing the couple's joint tax returns and failed to pay the taxes due for several years. According to the court, the wife's knowledge of her husband's poor credit rating and high levels of debt, plus her previous payment of over $53,000 for one year of the couple's delinquent joint tax liabilities, gave her both actual and constructive knowledge that their taxes had not been paid and would not be paid. Ryke v. Comm'r, T.C. Memo. 2017-144.

Facts

Dr. Nicole Ryke and Jamie Ryke were married in 2004 and are still married. Dr. Ryke is a medical doctor specializing in family medicine. She has no background in accounting or tax law. Mr. Ryke is a self-employed attorney who has practiced in probate and bankruptcy law. The Rykes have four children. During 2009 and 2012, the years at issue, Dr. Ryke was a medical resident working long hours and caring for the children. She paid for her medical education with a combination of support from her grandfather and student loans. She is now in her fifth year of private practice. Her practice has grown, resulting in increased income in 2016.

Mr. Ryke has a history of failing to pay his debts. Dr. Ryke learned of his financial troubles when the couple bought a house before marrying. Although Dr. Ryke did not know the specifics of Mr. Ryke's financial past, she knew he had a low credit score and outstanding student loans. As a result, the Rykes had separate credit cards, and the mortgage was in Dr. Ryke's name alone.

The Rykes filed joint tax returns for 2004 through 2012. Each year, Mr. Ryke gathered documents and gave them to an accountant who prepared the returns. Mr. Ryke would receive the returns, ask Dr. Ryke to sign them, then file them. Dr. Ryke had little opportunity to inspect the returns and did not examine them when she signed them. With the exception of 2009, the tax liability for the years at issue resulted from the Rykes' failure to pay the tax reported as due on the return. For 2009, part of the liability related to two income items the Rykes did not include on their return: short term disability that Dr. Ryke received, and interest. Each year, the Rykes reported a balance due on their return but did not submit payment. Dr. Ryke believed her husband was paying the full tax liability when he filed each return.

In 2011, Dr. Ryke became aware of her and her husband's outstanding joint tax liabilities. She paid the IRS approximately $53,000 for the couple's 2007 and 2008 taxes owed. Dr. Ryke made the payment at her husband's request, believing that it would satisfy their tax liabilities in full. However, Dr. Ryke did not inquire about the amount or source of the outstanding tax liabilities or whether they owed any additional tax. Dr. Ryke finally learned the details of the couple's outstanding tax liabilities in May 2014. On an accountant's advice, Dr. Ryke began filing separate returns starting with her 2013 return. Dr. Ryke is currently in full compliance with the tax laws.

Later in 2014, Dr. Ryke submitted an innocent spouse relief request for 2008 through 2012. The Rykes' liabilities for 2010 and 2011 had been paid, so her request for those years was dismissed. The IRS denied her request for 2008, 2009 and 2012. The Rykes then paid the remaining liability for 2008, leaving approximately $55,000 of outstanding tax debt for 2009 and 2012. In August 2015, Dr. Ryke filed a Tax Court petition to challenge the innocent spouse denial for those years.

Analysis

In general, married taxpayers are jointly and severally liable for the entire tax liability on their joint tax return. If such liability arises from an underpayment, a spouse may request equitable relief under Code Sec. 6015(f). The IRS can grant such relief if, under the facts and circumstances, it is inequitable to hold the spouse liable for the unpaid tax. Rev. Proc. 2013-34 provides seven factors to guide the determination of whether a spouse qualifies for equitable relief. The factors are the requesting spouse's (1) marital status, (2) economic hardship if relief is not granted, (3) knowledge or reason to know that the taxes would not be paid, (4) legal obligation to pay the outstanding tax liability, (5) receipt of a significant benefit from the unpaid tax liability, (6) compliance with tax laws, and (7) mental and physical health.

The Tax Court denied Dr. Ryke's request for relief. Dr. Ryke argued that the liabilities were attributable to tax imposed on her husband's income, and that she was unaware that the tax was not paid when due. Rejecting that argument, the court found that Dr. Ryke did not meet factor (3), above, because she had both knowledge that some of the taxes had not been paid and reason to know that the taxes would not be paid. The court reasoned that before marrying, Dr. Ryke knew Mr. Ryke had poor credit and was in debt. The court also noted that Dr. Ryke learned of the couple's taxes owed in 2011 and paid over $53,000 toward those liabilities; however, she stated that she did not ask about the source of the tax liabilities, or whether the payment was for the full amount. As a result, the court determined that Dr. Ryke had reason to know that her husband was not paying the taxes owed each year, and had actual knowledge of the couple's outstanding tax liabilities. The fact that she did not know the details of the liabilities was immaterial, because she had reason to know their full extent, and failing to obtain actual knowledge did not release her from the liabilities, according to the court.

Applying the remaining six factors, the Tax Court found that those factors were either neutral or weighed slightly in favor of relief, but not enough to change the outcome. The court found that Dr. Ryke did not receive a significant benefit from the underpayment. She was in compliance with the tax laws, having met both her filing requirements and payment obligations since filing separately in 2013. However, Dr. Ryke's efforts to comply with the tax laws from 2013 forward did not negate what the court called her self-imposed ignorance with regard to the couple's outstanding joint tax liabilities.

The Tax Court determined that the remaining factors were neutral. The Rykes remained married, and there was no agreement between them limiting Dr. Ryke's responsibility for joint liabilities. Dr. Ryke did not show that she would suffer economic hardship if no relief was granted, according to the court, because her income exceeded her expenses by $1,400 per month and her medical practice was growing. Finally, Dr. Ryke did not offer evidence that her mental or physical health was impaired currently or at the time of filing, according to the court.

For a discussion of innocent spouse relief, see Parker Tax ¶260,560.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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