Bookkeeper/office manager’s innocent spouse claim is denied

The Tax Court ruled that a petitioner did not qualify for innocent spouse relief under Sec. 6015 on her and her husband’s returns from 2007 through 2009.

Facts: Bonnie Maria Armour (petitioner) and Mark V. Poulsen (intervenor) were married during the tax years at issue but separated in 2009 and divorced in 2010. Poulsen owned MVP Builders, a home improvement company he started in the 1980s. Prior to and after their marriage, Armour worked as the company bookkeeper and office manager. She had control over all the accounting functions of the business, including managing the financial records, bank accounts, and credit card accounts. She had authority to sign and write checks on behalf of the company. She also managed the accounts payable and receivable and tracked inventory. She provided the company’s financial information to its CPA, who prepared her and her husband’s joint individual returns.

The IRS audited Armour and Poulsen’s tax returns from 2007 through 2009 and determined that they underreported income from MVP (then a sole proprietorship) for 2007 and 2008 as well as from a horse business that Armour ran in 2009. The IRS assessed a tax deficiency for the three years of $101,282 (of which $97,529 was related to MVP) and $18,855 in penalties. As of July 2016, Poulsen had paid approximately $75,000 of the tax liability, while Armour had not paid anything.

Issues: The Tax Court first considered Armour’s claim under Sec. 6015(b)(1), which grants relief if all five of the following requirements are met:

• A joint return was made for the tax year in question;
• There is an understatement of tax attributable to erroneous items of the nonrequesting spouse;
• The requesting spouse “establishes that in signing the return, he or she did not know, and had no reason to know, that there was such understatement”;
• It would be inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement, given all the facts and circumstances; and
• The requesting spouse invokes Sec. 6015(b) within two years after the date the IRS has begun collection actions with the respect to the requesting spouse.

The IRS contended that Armour did not meet the third requirement, not to have known or have reason to have known of the understatement. Since she was the bookkeeper and office manager for two decades and had control over MVP’s financial records, she must have known of the underreporting of income, the IRS argued.

Armour also sought relief under Sec. 6015(c), which allows a divorced or legally separated spouse to elect to limit the tax liability in the same way it would have been had the couple filed their tax returns separately. To qualify for Sec. 6015(c) relief, the taxpayer must meet three requirements:

• The spouses filed joint returns for the years involved;
• At the time the election was made, the spouses were legally separated, divorced, or had not been members of the same household anytime during the previous 12 months; and
• The request for relief was made within two years of the first collection activity.

Even if all three requirements are met, Sec. 6015(c) relief is not available if the IRS demonstrates that the requesting spouse had actual knowledge (a higher standard than knowledge or reason to know) of any item giving rise to a deficiency.

Armour also claimed relief under Sec. 6015(f), which states that relief can be prescribed if “(1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency and (2) relief is not available to the requesting spouse under subsection (b) or (c).” The court looked for guidance in Rev. Proc. 2013-34, Section 4, which lists the threshold conditions and other factors by which the IRS will grant relief under Sec. 6015(f).

Holding: The court denied Armour’s claim under all three subsections of Sec. 6015.

With respect to Sec. 6015(b) relief, although, as Armour argued, she was not an owner of the company and made only data entries, nonetheless, by her position as bookkeeper and office manager of MVP, she knew of the understatements of tax. Likewise, under Sec. 6015(c), she had actual knowledge of MVP’s financial circumstances, including expense items unallowable as deductions.

Regarding equitable relief under Sec. 6015(f), the court found that Armour met the threshold conditions, and the IRS conceded that she met two of the nonexclusive factors the IRS weighs under Rev. Proc. 2013-34, Section 4.03: marital status (being no longer married), and having made a good-faith effort to comply with income tax laws subsequently. The court analyzed the remaining five factors of whether Armour would suffer economic hardship if relief were not granted; knew or had reason to know of the item giving rise to an understatement or deficiency; significantly benefited from the tax understatement; was in poor physical or mental health; or whether either spouse had a legal obligation to pay the outstanding tax liability.

The court found the economic hardship factor weighed in favor of relief and the legal obligation factor was inapplicable. Weighing against relief, however, was that (1) Armour received a significant economic benefit, including by writing checks to herself from MVP for her personal use and to support her horse business, and (2) there was no evidence she was ill. Additionally, just as the court found with respect to relief under Secs. 6015(b) and (c), her knowledge or reason to know of the understatements also weighed against Sec. 6015(f) relief. The court noted that there was no evidence that her husband abused her or restricted her access to financial information, which can be considered in assessing whether a requesting spouse had reason to know of an understatement.

In addition, with regard to her horse business, under all three subsections, the court found that the business items were allocable to Armour or otherwise ineligible for relief because she conceded responsibility for them.

Accordingly, the court held that Armour was not entitled to innocent spouse relief for any of the joint liabilities for the years at issue.

• Armour, T.C. Memo. 2016-129

—By David R. Silversmith, CPA, a practitioner in Woodbury, N.Y.