The U.S. Tax Court (Tax Court) has restated the basic principles for a person to obtain “innocent spouse” relief from tax assessments. The criteria are as follows:
“Rev. Proc. 2013-34, supra, provides a three-step analysis to follow in evaluating a request for relief. The first step consists of seven threshold conditions that must be met: (1) the requesting spouse filed a joint return for the taxable year for which he or she seeks relief; (2) relief is not available to the requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme by the spouses; (5) the non-requesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the non-requesting spouse. ”
These factors are balanced by the IRS and/or the Tax Court to determine if a spouse or ex-spouse is jointly and severally liable for tax deficiencies. The issue is whether innocent spouse relief is extended to failure to report offshore financial accounts.
U.S persons are required to file a Report of Foreign Bank or Financial Account (FBAR) by June 30 for all offshore accounts which in the aggregate total $10,000 or more in the preceding calendar year. FBAR filing is required under the Bank Secrecy Act, (BSA) while innocent spouse protections are afforded under the Internal Revenue Code (IRC). The penalties for failing to file an FBAR can be assessed against all U.S. taxpayers who have signature authority or control over offshore financial accounts. Therefore, the authority over or knowledge of the account or use of the account proceeds are very important factors in determining whether the BSA applies.
The FBAR civil penalties range from a warning letter, to $10,000 per account per year for non-willful violations to the greater of $100,000 or 50% of the highest account balance per year for up to six years for “willful” violations.
The IRS administers FBAR civil enforcement under agreement with the Treasury Dept. It is again worth noting that the BSA and IRC are different statutory schemes and while there is discretion in determining whether the FBAR violation is “non-willful” or “willful” the factors are not necessarily the same or applied in the same manner. A person granted “innocent spouse equitable relief” could still be subject to “non-willful” penalties for FBAR violations if they had signature authority on the offshore accounts. For this reason it is important for a person who may claim innocent spouse status to do so in a timely manner and consider participating in the IRS Offshore Voluntary Disclosure Program (OVDP).