Order Code RS20090
March 1, 1999
CRS Report for Congress
Received through the CRS Web
Taxpayer Bill of Rights 3: 1998 Tax Law, Part 1 New Rules for Innocent and Ex-Spouses
American Law Division
This is the first in a series of reports designed to analyze changes to tax law made
in the Taxpayer Bill of Rights 3, enacted as Title III of the IRS Reform and Restructuring
Act of 1998 (P.L. 105-206). This report describes and analyzes the liability of spouses
for taxes due on joint returns, the recent changes in that law, and its historical
development. It will be updated as necessary.
Shortly after the enactment of the modern income tax law, it was amended to permit
joint returns for spouses. IRS soon took the position that, when joint returns were filed,
spouses were to be treated as one for tax purposes, including liability. Later, Congress
specifically provided for joint and several liability for joint returns.
Incidents of inequitable results prompted an attempt to moderate the impact of joint
spousal liability through enactment of the so-called innocent spouse provisions. Under
the law as it existed prior to the 1998 amendments, however, it was possible to qualify
as an innocent spouse and avoid the operation of the joint and several liability rules only
if a taxpayer satisfied very stringent conditions. This stringency led to some harsh results
and considerable criticism.
Congress responded to this criticism, by including in the IRS Restructuring and
Reform Act of 1998 provisions designed to ease the requirements that must be met to
qualify for the innocent spouse exception, to eliminate the monetary thresholds for
claiming relief, to modify the requirement that an understatement of tax liability be the
result of a grossly erroneous item of the other spouse, and to permit a separate liability
election by taxpayers who are divorced, legally separated, or who have lived separate and
apart for 12 months.
Congressional Research Service ˜ The Library of Congress
When the modern income tax was enacted in 1913, there was no provision allowing
married individuals to file joint returns. Separate returns were required.1 Five years later,
in 1918, the statutes were amended to permit, but not require, the filing of joint returns.2
At that time there were no special rates for married taxpayers filing jointly. The most
significant benefit may have been convenience for the taxpayers and collectors. The
statute did not address the question of the nature of the tax liability imposed, and one
might presume that the old rules were not changed by allowing joint filing. Nevertheless,
the Internal Revenue Bureau (predecessor of the IRS) soon took the position that spouses
filing jointly were a single taxable unit, and jointly and severally liable for taxes owed on
the joint return.3 While that interpretation was rejected by the courts,4 Congress eventually
accepted the Bureau’s position and amended the tax law to impose joint and several
liability on joint filers in 1938.5 At this point, there were no separate rates for married
taxpayers, and the primary beneficiary of joint filing remained the tax collector.
Thirty years after the enactment of the optional joint return provision and ten years
after the adoption of the joint and several liability provision, Congress acted to provide a
separate rate structure for married taxpayers filing jointly, in effect incorporating income
splitting into the rate structure.6 That provision was part of a 1948 statutory overhaul
intended to equalize the treatment of taxpayers from common law and community property
states.7 In 1969, apparently in response to complaints from single taxpayers that they
Tariff Act of 1913, P.L. 63-16, ch. 16, § II; see especially § II(A)(2) - personal returns to be
made. 38 Stat. 114, 166.
Revenue Act of 1918, P.L. 65-254, ch. 18, § 223, 40 Stat. 1057, 1074.
I.T. 1575, 2-1 C.B. 144.
See, e.g., Cole v. Commissioner, 81 F.2d 485 (9th Cir. 1935).
Revenue Act of 1938, P.L. 75-554, ch. 289, § 51(b), 52 Stat. 447, 476. "In the case of a husband
and wife living together the income of each (even though one had no gross income) may be included
in a single return made by them jointly, in which case, the tax shall be computed on the aggregate
income, and the liability with respect to the tax shall be joint and several." In its report the House
Ways and Means Committee said of this amendment that: "It is necessary, for administrative
reasons, that any doubt as to the existence of such liability should be set at rest, if the privilege of
filing such joint returns is continued.’‘ H.Rept. 75-1860, 75th Cong., 3rd Sess. 21 (1938).
Revenue Act of 1948, P.L. 80-471, ch. 168, § 301, 62 Stat. 110, 114. "In the case of a joint
return of husband and wife under section 51(b), the combined normal tax and surtax under section
11 and subsection (b) of this section shall be twice the normal tax and surtax that would be
determined if the net income and the applicable credits against net income provided by section 25
were reduced by one-half." The result is that the income is taxed at a lower rate — the rate that
applies to one-half the total — instead of at the higher rate that would apply to the total, as under
For a discussion of this aspect of the 1948 Revenue Act, see S.Rept. 80-1013, 80th Cong., 2nd
Sess., reprinted in 1948 U.S. Code Cong. & Ad. News at 1163, 1184-1191. There the Committee
Under the existing law the treatment accorded families earning the same amount
of income is very different if they happen to live in States using the community-property
were not being treated as well as married couples filing jointly, Congress reduced the rates
for single taxpayers, revised the head-of-household rates, and retained the old rates for
Changes in society, with an increasing number of two earner couples and a higher
divorce rate, led to more spousal tax liability cases before the courts, and the criticism of
the harshness of the liability rule mounted.9 Responding to some egregious cases which
were brought to its attention, Congress provided limited relief for the harshest
circumstances with the adoption of the "innocent spouse" exception.10
system or in States which use common law. Chiefly, this is due to the fact that under
the community-property system the earnings of a married couple are considered to be
one-half the property of each. Income arising out of an accumulation which took place
during the marriage is divided in the same manner, and in some community-property
States the same division is made of income from assets which are the separate property
of one of the spouses. No similar division takes place under common law. The
earnings of the husband are his own and taxed to him. The income from his property
is his income and is taxed as such. (at 1184)
Your committee believes that the best answer to the problem of geographical
equalization is the splitting of the combined income of the husband and wife. Income
splitting is effected under H.R. 4790, as amended, by giving husbands and wives in all
States the option to file joint returns. In these returns their combined net income and
their combined exemptions are divided by 2. A tax is computed on this basis and
multiplied by 2.
Income splitting will produce the same result in common-law States which now
obtain in a community-property State when the entire income of both spouses is
community income. If, however, spouses in community-property States have separate
income, they may split their income by electing to file a joint return. Under existing
law, separate income in community-property States is taxed in full to the spouse who
receives it. Thus, the type of solution embodied in H.R. 4790 as amended, benefits
residents of both common law and community-property States. (at 1186)
Tax Reform Act of 1969, P.L. 91-172, §803, 83 Stat. 487, 678-709. For an explanation of this
provision, see Staff of the Joint Comm. on Taxation, GENERAL EXPLANATION OF THE TAX REFORM
ACT OF 1969, 91st Cong., 2nd Sess. 222-224 (Comm. Print 1970). Thus began what has become
known as the marriage penalty. While it has been frequently argued that the liability imposed on
married persons filing jointly is the price they pay for the advantages of filing jointly, history shows
that joint and several liability was urged by the I.R.B. before the enactment of income splitting, that
Congress adopted the joint and several liability rule before enactment of income splitting, and that
the benefits of income splitting were substantially reduced by the 1969 changes. Indeed, for many
two-income married taxpayers a return to 1913 law with separate returns and one rate structure
would seem preferable.
Richard C. E. Beck, The Innocent Spouse Rules: Joint and Several Liability for Income Taxes
Should Be Repealed, 43 VAND. L. REV. 317, 348-49 (1990).
P.L. 91-679, 84 Stat. 206. In its report on the provision the House Ways and Means Committee
made it plain that this was the reason for the legislation, quoting an opinion from the Tax Court
suggesting the need for a legislative remedy. H.Rept. 91-1734, 91st Cong., 2nd Sess. 2 (1970).
Innocent Spouse: Before Taxpayer Bill of Rights 3
Prior to the adoption of the 1998 amendments, the innocent spouse rules were
codified at I.R.C. §6013. Briefly, the prerequisites were: 1) the making of a joint return;
2) a "substantial understatement" of tax liability due to "grossly erroneous items"
attributable to the "not so innocent" spouse; 3) no knowledge of, and no reason to know
of, the substantial understatement by the "innocent" spouse when signing the return; 4) and
inequity, under all the facts and circumstances, to hold the "innocent" spouse liable for the
tax deficiency resulting from the understatement. The burden of proof for all these
elements was on the party claiming innocent spouse status. One potential difficulty,
especially when the spouses subsequently separated or divorced, was that the one claiming
innocent spouse status might well not have access to the data needed to determine the
liability and establish the claim. Not surprisingly, the not so innocent spouses did not
always prove cooperative.
The innocent spouse rule was oft criticized as hard, inconsistent and inequitable in
application, and ex-wives continued to pay for former husbands’ tax indiscretions in many
cases.11 I.R.C. § 6013(e)(2) defined "grossly erroneous items" as any omitted item of
income and "any claim of a deduction, credit, or basis ... in an amount for which there is
no basis in law or fact." If the spouse succeeded in establishing that there was no basis in
law or fact for a deduction and thus satisfied the second standard, the tax collector might
counter that the spouse proved that she (he) knew or should have known about the
substantial understatement and thus could not qualify for innocent spouse status.12
Mounting criticism of the innocent spouse rule led to calls for a congressional review of
Congress Acts: 105th Congress
Reacting to these concerns , the 105th Congress witnessed the introduction of various
proposals. Hearings were held by the tax writing committees in both the House and
Senate. At Senate Finance Committee hearings held on February 11, 1998, the Committee
heard testimony from four women who were objects of IRS collection efforts for taxes
resulting from activities of their former spouses. One of those witnesses was Elizabeth
Cockrell, from whom the IRS was attempting to collect some $680,000 in taxes, penalties
and interest. As a young Canadian college graduate, she had married an American and
Originally applicable only to cases involving omissions from income, the innocent spouse
exception to joint and several liability was extended to cases where the deficiency was the result
of an improperly taken deduction, credit or basis. P.L. 98-369, § 424, 98 Stat. 494, 801-803
(1984). In all cases, however, there were stringent requirements that a taxpayer seeking innocent
spouse status had to satisfy to qualify for the exception.
See, e.g., Beck, supra note 9 and Lisa K. Edison-Smith, Comment, "If You Love Me, You’ll Sign
My Tax Return:" Spousal Joint and Several Liability for Federal Income Taxes and the "Innocent
Spouse" Exception, 18 HAMLINE L. REV. 102 (1994). Beck also noted the pattern of inconsistency
in the application of these standards.
Jerome Borison, Innocent Spouse Relief: A Call for Legislative and Judicial Liberalization, 40
TAX LAW. 819, 842-860., contains an extended discussion of the burden of proof and the no basis
in law or fact requirement, including the "Catch 22" position the spouse may face.
moved to the United States in 1979. Her husband was a commodities broker, she an
English literature major, who became a stock broker trainee in December of 1980 and got
her license early in the following year. Nothing in her training or background gave her
expertise in commodities trading. For 1979-1981, the husband prepared or had prepared,
and she signed, joint returns. The couple separated in 1982 and divorced the following
year. In 1987 her ex-husband told her of correspondence from IRS involving a dispute
over losses claimed on their joint returns and resulting from commodities straddle
transactions he had engaged in. He asked her to sign some papers to help settle the case
and sent her a letter acknowledging that the transactions were his and that he was
responsible for any taxes due on them. What she signed was a waiver of the statute of
limitations, and in 1992 IRS began efforts to collect the taxes due from Ms. Cockrell.13
Ms. Cockrell sought refuge in the innocent spouse exception, but to no avail, as her claims
were rejected twice by the Tax Court, a decision affirmed by the U.S. Court of Appeals
(2nd Cir.).14 In sum, Ms. Cockrell was liable for taxes due as a result of transactions by and
for her ex-husband — who apparently had seven-figure Swiss bank accounts and who was
an expert commodities trader — and despite the fact that she was acknowledged to have
been ignorant of the underlying transactions. Three other ex-wives provided similar
testimony of IRS pursuit of them as a result of tax liabilities predicated on financial
transactions of former spouses. The Committee also heard from tax experts who called
for reform or replacement of the existing rules. Responding to what appears to have been
a broad consensus, Congress made substantial changes in the rules governing joint and
several liability of spouses filing joint returns in the Internal Revenue Service Reform and
Restructuring Act of 1998.15
Innocent Spouse: Taxpayer Bill of Rights 3
The new statutory provisions provide three avenues of relief: 1) for married taxpayers
filing jointly, more liberal standards for innocent spouse status than were available under
prior law; 2) for those who have since separated or divorced, the opportunity to elect
separate liability; and 3) for taxpayers who fail to qualify for innocent spouse or separate
liability relief, discretionary authority for equitable relief.16
Those who filed joint returns can seek innocent spouse status under more liberalized
rules than were imposed by prior law. Under the new law such relief is available for any
understatement of tax liability. Under the old law relief was available only for "substantial
understatements," and those were defined by dollar amounts ($500 or a percentage of
income). The prior law requirement that the understatement be attributable to "grossly
erroneous" items attributable to the other spouse has also been eliminated. It is enough
now that there is an understatement attributable to the other spouse. Those claiming the
status must still establish that they did not know and had no reason to know of the
For an unofficial transcript of the Senate Finance Committee hearings see, 98 TNT 32-23, Doc.
98-6302, TAX NOTES TODAY, February 18, 1998.
Crowley v. Commissioner, T.C. Memo 1193-503 (Nov. 1, 1993), T.C. Memo 1995-551 (Nov.
20, 1995); aff’d.sub nom. Cockrell v Commissioner, 116 F.3rd 1472 (2nd Cir. 1997); cert. denied
118 S.Ct. 1163 (1998).
P.L. 105-206, §3201.
understatement of tax, and taking into account all the facts and circumstances it must still
be found unfair to hold claimant liable for the taxes due. A spouse pursuing innocent
spouse status may be entitled to a refund.
The new law permits those who are divorced, legally separated, or have lived
separate and apart for a year to request separation of liability. If the taxpayer filed a joint
return and is now divorced, legally separated, or has lived separate and apart for at least
a year prior to filing the request, she(he) will qualify for such treatment and tax liability will
be determined in much the same manner as if separate returns had been filed. Special rules
were included to prevent the improper use of the election. Thus, even if otherwise
qualifying, a request for separate liability may be refused if IRS proves that the spouses (or
former spouses) transferred assets as part of a fraudulent scheme or to avoid taxes or the
payment of taxes, or if IRS proves actual knowledge that items giving rise to the
deficiency and attributable to a spouse (or former spouse) were incorrect. This provision
would have benefitted Ms. Cockrell and the other women who testified before the Senate
Committee on Finance with her. Only the hard to attain innocent spouse exemption was
available to former and separated spouses under prior law. A request for separation of
liability will not generate a refund.
Equitable relief may be available for those who cannot qualify for separation of
liability or innocent spouse status, including spouses from community property states who
file separately. The Secretary may make such relief available when under all the facts and
circumstances it would be unfair to hold the taxpayer liable for the understatement or
underpayment of a tax. This is the one remedy available for an underpayment of taxes.
Under prior law, if a spouse took funds intended for taxes for his or her own use, there
was no escape from joint and several liability.17
The conference committee report discussed the anticipated uses of this equitable authority:
The conference agreement does not include the portion of the Senate amendment
that could provide relief in situations where tax was shown on the joint return, but not
paid with the return. The conferees intend that the Secretary will consider using the
grant of authority to provide equitable relief in appropriate situations to avoid the
inequitable treatment of spouses in such situations. For example, the conferees intend
that equitable relief be available to a spouse that does not know, and had no reason to
know, that funds intended for the payment of tax were instead taken by the other spouse
for such other spouse’s benefit.
The conferees do not intend to limit the use of the Secretary’s authority to provide
equitable relief to situations where the tax is shown on a return but not paid. The
conferees intend that such authority be used where, taking into account all the facts and
circumstances, it is inequitable to hold an individual liable for all or part of any unpaid
tax or deficiency arising from a joint return. The conferees intend that relief be
available where there is both an understatement and an underpayment of tax. H.Rept.
105-599, 105th Cong., 2nd Sess. 254-255 (1998).
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