SN 99(15)

Innocent Spouse Relief, Separation of Liability, and Equitable Relief

This publication has been superseded by PS 2016(2) and can no longer be relied upon

PURPOSE: The purpose of this Special Notice is to describe new legislation that allows the Commissioner of Revenue Services to grant relief from joint and several liability for Connecticut income tax, interest, penalties and other amounts due for the taxable year.

EFFECTIVE DATE: Effective for tax liabilities arising after May 27, 1999, and any liability arising on or before that date, if the liability remains unpaid on that date.

STATUTORY AUTHORITY: 1999 Conn. Pub. Acts 48, §4.

BACKGROUND: Taxpayers who file a joint Connecticut income tax return are jointly and severally liable for the income tax, interest, penalties, and other amounts due (hereinafter references to "tax" include interest, penalties, and other amounts due), on their joint return. This means that one individual may be liable for the entire amount of tax due on the joint return even if that individual did not earn any income for the taxable year or was unaware of errors (intentional or otherwise) reported on the return. This is true even if the individual has subsequently become divorced from the other joint filer.

Under the new law, a taxpayer may request relief from joint and several liability. Three types of relief are available:

• Innocent spouse relief
• Separation of liability
• Equitable relief

INNOCENT SPOUSE RELIEF: Innocent spouse relief allows the requesting individual ("innocent spouse") to be relieved of a deficiency to the extent the liability is attributable to an understatement of tax caused by an erroneous item of the non-requesting individual. In these situations, the Department of Revenue Services (DRS) must collect the outstanding liability from the non-requesting individual ("other spouse").

Relief with respect to a deficiency will be granted if the following requirements are met:

• A joint return was filed by the innocent spouse and the other spouse for the taxable year for which relief is requested;
• There is an understatement of tax attributable to erroneous items of the other spouse;
• In signing the return, the innocent spouse did not know, and had no reason to know, that there was an understatement of tax (If an innocent spouse fails to meet this condition, he or she may still qualify for partial innocent spouse relief. See Partial Innocent Spouse Relief below.);
• Taking into account all the facts and circumstances, it is inequitable to hold the innocent spouse liable for the deficiency in tax for the taxable year attributable to the understatement or portion of the understatement; and
• The innocent spouse elects to apply for relief no later than two years after the date of the Commissioner’s first collection activity after May 27, 1999, with respect to such individual.

Partial Innocent Spouse Relief: If all of the requirements are met except that the innocent spouse knew, and had reason to know, that there was an understatement of tax, but did not know the extent of the understatement, then the innocent spouse is eligible for relief to the extent that the liability is attributable to the portion of the understatement of which such individual did not know or had no reason to know.

Erroneous items. As used in this special notice, "erroneous items" are either of the following:

• Unreported income. This is any gross income item received by the other spouse that is not reported and that affects the Connecticut income tax liability of the spouses.
• Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis that is claimed by the other spouse and that affects the Connecticut income tax liability of the spouses.

Understatement of tax. An understatement of tax is generally the difference between the total amount of Connecticut income tax that should have been shown on the spouses’ Connecticut income tax return and the amount of Connecticut income tax that was actually shown on the spouses’ Connecticut income tax return.

Innocent spouse relief may generate a refund.

Facts and Circumstances Used to Determine Whether it is Inequitable to Hold the Requesting Spouse Liable for the Deficiency: DRS will consider all of the facts and circumstances in determining whether it is inequitable to hold the requesting individual responsible for the understatement. DRS may determine that it is inequitable to hold the requesting individual liable for the deficiency if the requesting individual:

• Did not receive any significant benefit from the understatement of tax; or
• Was later divorced from or deserted by the non-requesting individual.