A taxpayer who files jointly can be relieved of responsibility for paying tax, interest and penalties if their spouse (or former spouse) improperly reported items or omitted items on their tax return. The taxpayer is jointly and individually responsible for any tax, interest and penalties that do not qualify for relief. The Internal Revenue Service can collect these amounts from either the taxpayer or the taxpayer’s spouse or former spouse.
However, innocent spouse relief only applies to individual income or self-employment taxes, noted tax attorney Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2022.” “This relief does not apply to household employment taxes, individual shared responsibility payments, and business taxes and the trust fund recovery for employment taxes,” she said. “The Tax Court just made this clear with respect to payroll taxes, which do not qualify for innocent spouse relief.”
In Chavis v. Commissioner, 158 T.C. No. 8, the taxpayer, acting pro se (for herself), challenged the imposition of trust fund recovery penalties, and the denial of innocent spouse relief with respect to those penalties and the determination that she did not qualify for “currently not collectible” status.
During 2011-2014 Angela Chavis and her then-husband were secretary and president, respectively, of Oasys Information Systems Inc., a C corporation they established in 2008. The couple’s home address was listed with the IRS as its business address.
Oasys withheld payroll taxes from its employees’ wages but did not pay those taxes over to the government. The IRS determined penalties against Chavis and her then-husband under IRC Code Section 6672, which provides that any person “required to collect, truthfully account for, and pay over” payroll taxes, who willfully fails to do so, shall be liable for a penalty “equal to the total amount of the tax evaded … or not accounted for and paid over.”
On July 13, 2015, the IRS sent Chavis Letter 1153, “Notice of Trust Fund Recovery Penalty,” by certified mail, along with Form 2751, “Proposed Assessment of Trust Fund Recovery Penalty.” The service proposed to assess joint and several liability for $146,682 against her and her then husband.
Chavis did not appeal the proposed assessment, and the IRS assessed the TFRP against her. She and her husband divorced in 2016, and the IRS was apparently successful in collecting a portion of the unpaid tax from her husband. In an effort to collect the balance, the IRS issued her a Letter 3172, “Notice of Federal Tax Lien Filing and Your Right to a Hearing,” showing an unpaid balance of $126,919 on Oasys’ payroll tax liability. Chavis submitted Form 8857, “Request for Innocent Spouse Relief,” in July 2019, alleging she had no dealings with Oasys and had agreed to sign Form 1040 jointly with her husband but “never signed any returns from Oasys.”
The IRS Cincinnati Centralized Innocent Spouse Operation processed her request, and informed her that she did not qualify for relief because Section 6015 applies to jointly filed income tax returns, not payroll tax liabilities.
The Tax Court held that because Chavis had a prior opportunity to challenge her TFRP liability upon receipt of Letter 1153, she was not entitled to challenge her underlying tax liability, and that the IRS did not abuse its discretion in sustaining the collection action. The court noted that TRFPs are “assessable penalties” and thus are not subject to deficiency procedures.
According to the ruling, “Because she had an opportunity to dispute her TFRP liability upon receipt of the Letter 1153 but declined to do so, she was not entitled to challenge her underlying tax liability at the CDC [Collection Due Process] hearing and may not advance such a challenge in this court.”
The settlement officer at the Independent Office of Appeals advised Chavis that she was not eligible for innocent spouse relief because her TFRP liabilities arose from Oasys’ unpaid payroll taxes, not from a joint federal income tax return. The Tax Court agreed.
“[Chavis’] TFRP liabilities were not shown on, and did not arise from the filing of, a joining federal income tax return,” the court stated. “Rather, her TFRP liabilities arose from her failure to discharge her duty, as an officer of Oasys, to ensure that payroll taxes collected from the company’s workers were properly paid over to the Department of the Treasury.”
“The issues in this case are not particularly complex,” Weltman said. She noted the decision was reported as a Tax Court opinion, indicating the court believes it addresses a sufficiently important legal or novel issue.
