Innocent Spouse: Alternatives For Improving Innocent Spouse Relief
(Testimony, 02/24/98, GAO/T-GGD-98-72).

GAO discussed its report on the innocent spouse provisions of the
Internal Revenue Code, focusing on: (1) the universe of taxpayers
potentially eligible for innocent spouse relief; (2) the Internal
Revenue Service's (IRS) practices and procedures for handling requests
for such relief; (3) whether the existing innocent spouse provisions
provide the same opportunity for relief for all taxpayers; (4) the
potential effects of replacing the joint and several liability standard
with a proportionate liability standard; (5) the potential effects on
IRS of requiring it to abide by the terms of divorce decrees that
allocate tax liabilities; and (6) the potential effects of limiting IRS'
ability to seize community income to satisfy the tax liabilities
incurred by one of the spouses before the marriage.

GAO noted that: (1) under current law, only about 1 percent of couples
who filed joint returns in 1992 had additional tax assessments that
potentially met the dollar threshold for innocent spouse relief; (2) if
only divorced taxpayers were counted, about 35,000 of the 587,000
couples with additional tax assessments of more than $500 for 1992 may
have been eligible for innocent spouse relief; fewer would probably
actually qualify; (3) the limited information available indicated that
IRS received few requests for innocent spouse relief and denied most of
them; (4) the current provisions may not ensure that all deserving
taxpayers receive equivalent relief; (5) one way to address concerns
with the innocent spouse provisions would be to replace the joint and
several liability standard with a proportionate liability standard; (6)
under this standard, each spouse becomes individually responsible for
the entire amount of the tax associated with a joint return; (7) under a
proportionate liability standard, couples would be responsible only for
the taxes generated by their individual incomes and assets; (8)
requiring IRS to be bound by divorce decrees is impractical for two
major reasons; (9) first, federal tax matters are the exclusive
jurisdiction of certain federal courts, while divorce matters are
generally handled by state courts; (10) thus, there is currently no
legal forum where IRS and the parties to a divorce could resolve issues
relating to both tax and divorce matters; (11) second, this proposal
could require IRS to become involved in every divorce settlement to
ensure that the government's interest is protected; (12) in community
property states, IRS can levy one spouse's income to satisfy the
premarital tax debts of the other spouse because of the joint ownership
of property in those states; (13) in contrast, IRS cannot levy the
income of one spouse to pay the premarital tax debt of the other spouse
in common law states because spouses do not have legal entitlement to
each other's property; (14) since IRS does not maintain data on how
often it levies community property to settle premarital tax debts, GAO
could not assess the potential impact on IRS of changing the law to
treat everyone the way it treats taxpayers in common law states; and
(15) the Department of Treasury's report parallels GAO's report on
identifying ways to improve the administration of the current innocent
spouse provisions.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-98-72
     TITLE:  Innocent Spouse: Alternatives For Improving Innocent Spouse 
             Relief
      DATE:  02/24/98
   SUBJECT:  Taxpayers
             Tax returns
             Personal liability (legal)
             Divorced persons
             Eligibility criteria
             Tax nonpayment
             State law
             Government publications
             Tax administration
IDENTIFIER:  IRS Offer in Compromise Program
             IRS Problem Resolution Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight, House Committee on Ways and
Means

For Release
on Delivery
Expected at
2:00 p.m.  EST
Tuesday
February 24, 1998

INNOCENT SPOUSE - ALTERNATIVES FOR
IMPROVING INNOCENT SPOUSE RELIEF

Statement of Lynda D.  Willis, Director, Tax Policy and
Administration Issues, General Government Division

GAO/T-GGD-98-72

GAO/GGD-98-72t


(268846)


Abbreviations
=============================================================== ABBREV

  IRS -

INNOCENT SPOUSE:  ALTERNATIVES FOR
IMPROVING INNOCENT SPOUSE RELIEF
==================================================== Chapter STATEMENT

Madame Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss our report on the innocent
spouse provisions of the Internal Revenue Code.  Like the Department
of the Treasury (Treasury), we were required under section 401 of the
Taxpayer Bill of Rights 2 to report to the Congress on certain issues
related to joint and several liability and the application of the
innocent spouse provisions. 

Our comments today are based on our report, which was issued in March
1997.\1 It has findings and, in several cases, recommendations
similar to those in the more recent Treasury report.\2 Specifically,
our report discussed (1) the universe of taxpayers potentially
eligible for innocent spouse relief, (2) the Internal Revenue
Service's (IRS) practices and procedures for handling requests for
such relief, (3) whether the existing innocent spouse provisions
provide the same opportunity for relief for all taxpayers, (4) the
potential effects of replacing the joint and several liability
standard with a proportionate liability standard, (5) the potential
effects on IRS of requiring it to abide by the terms of divorce
decrees that allocate tax liabilities, and (6) the potential effects
of limiting IRS' ability to seize community income to satisfy the tax
liabilities incurred by one of the spouses before the marriage. 

Our testimony today makes the following points: 

  -- Under current law, only about 1 percent of the couples who filed
     joint returns in 1992 had additional tax assessments that
     potentially met the dollar threshold for innocent spouse relief. 
     If only divorced taxpayers were counted, about 35,000 of the
     587,000 couples with additional tax assessments of more than
     $500 for 1992 may have been eligible for innocent spouse relief. 
     However, our estimate of 587,000 couples represents the maximum
     number of couples potentially eligible for innocent spouse
     relief; fewer would probably actually qualify.  For instance,
     some of the 587,000 couples may not have qualified for innocent
     spouse protection because they knew there was a substantial tax
     understatement.  This knowledge would have made them ineligible
     for relief even if the tax deficiency was solely attributable to
     the actions of one spouse. 

  -- The limited information available indicated that IRS received
     few requests for innocent spouse relief and denied most of them. 
     Although we could not determine why few requests were made, we
     observed that IRS publications provide little information on how
     to request innocent spouse relief and that IRS has no specific
     form or process for applying for such relief. 

  -- The current provisions may not ensure that all deserving
     taxpayers receive equivalent relief.  For example, the dollar
     thresholds for claiming innocent spouse relief may preclude some
     deserving taxpayers from obtaining relief because of the amount
     of their liability.  We estimated that for tax year 1992, about
     40,000 additional divorced couples might have been eligible for
     innocent spouse relief if the dollar thresholds had been
     eliminated. 

  -- One way to address concerns with the innocent spouse provisions
     would be to replace the joint and several liability standard
     with a proportionate liability standard.  Under the joint and
     several liability standard, each spouse becomes individually
     responsible for the entire amount of the tax associated with a
     joint return.  Under a proportionate liability standard, couples
     would be responsible only for the taxes generated by their
     individual incomes and assets.  Options for administering
     proportionate liability include (1) requiring all taxpayers to
     file separately, (2) modifying joint returns so that each
     spouse's income and deductions are reported separately, and (3)
     applying proportionate liability only in cases where there are
     unpaid taxes or subsequent tax assessments.  Each of these
     options represents a trade-off between clearly establishing each
     taxpayer's liability and the amount of paperwork and
     administrative burden created for taxpayers and IRS.  Each could
     also increase the costs of IRS' enforcement programs. 

  -- Requiring IRS to be bound by divorce decrees is impractical for
     two major reasons.  First, federal tax matters are the exclusive
     jurisdiction of certain federal courts, while divorce matters
     are generally handled by state courts.  Thus, there is currently
     no legal forum where IRS and the parties to a divorce could
     resolve issues relating to both tax and divorce matters. 
     Second, this proposal could require IRS to become involved in
     every divorce settlement to ensure that the government's
     interest is protected.  In 1994, about 1.2 million divorce
     decrees were granted in the United States.  Even if IRS were
     bound by divorce decrees, these decrees could be manipulated to
     thwart IRS' collection efforts.  For example, one spouse might
     retain sole ownership of the couple's residence, the couple's
     major asset, while the spouse without assets takes
     responsibility for the taxes.  Thus, IRS would not be able to
     place a lien against the residence to force collection action
     for any delinquent taxes. 

  -- In community property states, IRS can levy one spouse's income
     to satisfy the premarital tax debts of the other spouse because
     of the joint ownership of property in those states.  In
     contrast, IRS cannot levy the income of one spouse to pay the
     premarital tax debts of the other spouse in common law states
     because spouses do not have a legal entitlement to each other's
     property.  Since IRS does not maintain data on how often it
     levies community property to settle premarital tax debts, we
     could not assess the potential impact on IRS of changing the law
     to treat everyone the way it treats taxpayers in common law
     states. 

  -- Treasury's report parallels our report on identifying ways to
     improve the administration of the current innocent spouse
     provisions.  They include revising publications to better
     educate and inform taxpayers on the provisions, creating a new
     form for applying for relief, training IRS staff on how to
     handle innocent spouse claims, and developing a process for
     ensuring consistency in processing innocent spouse claims. 
     Also, Treasury recommended several statutory changes that would
     give more taxpayers opportunities to qualify for innocent spouse
     relief, would allow the Tax Court to review IRS denials of
     innocent spouse claims, and would suspend collection actions
     against one spouse when the other is contesting a proposed
     assessment in Tax Court.  While we did not recommend any
     statutory changes, we did point out in our report the inequities
     of not allowing more taxpayers to be eligible for relief.  Our
     report did not discuss having the Tax Court review denied
     innocent spouse claims or suspending collection actions on Tax
     Court cases. 

I would like to discuss each of these points in more detail after
providing an overview of the current innocent spouse provisions and
presenting several examples of how IRS administers the provisions. 


--------------------
\1 Tax Policy:  Information on the Joint and Several Liability
Standard (GAO/GGD-97-34, March 12, 1997). 

\2 Report to the Congress on Joint Liability and Innocent Spouse
Issues (Department of the Treasury, February 9, 1998). 


   INNOCENT SPOUSE PROVISIONS
-------------------------------------------------- Chapter STATEMENT:1

Under the joint and several liability standard, when a married couple
files a joint federal income tax return, each spouse becomes
individually responsible for paying the entire amount of the tax
associated with that return.  As a result, one spouse can be held
liable for tax deficiencies assessed after a joint return was filed,
even if the additional taxes were solely attributable to the income
of the other spouse.  Married couples can file separately and be held
liable only for the taxes accruing from their own income, but couples
who file this way may face a higher total tax bill than if they filed
jointly. 

An example of the potential liability resulting from joint filing
would be if IRS discovered that one spouse actually had an additional
$5,000 in income not reported on the joint return that the other
spouse was not aware of.  If IRS cannot collect the additional taxes
owed on the unreported income from the culpable spouse, it may seek
to collect the taxes from the "innocent spouse." However, the
innocent spouse may obtain relief from the additional tax liability
if certain conditions are met. 

The current innocent spouse provisions only apply to taxes assessed
after the joint return was filed.  The provisions do not apply to
underpayments of the taxes reported on the joint return because any
underpayments are expected to be known by both spouses signing the
joint return.  The provisions allow relief from the joint and several
liability standard when

  -- the innocent spouse has filed a joint return with the culpable
     spouse;

  -- the innocent spouse did not know and had no reason to know there
     was a substantial tax understatement (knowledge test); and

  -- taking into account all the facts and circumstances, it is
     inequitable to hold the spouse liable for the additional tax
     attributable to the substantial understatement of the culpable
     spouse. 

In addition, the spouse requesting relief must meet certain dollar
thresholds that vary depending on the cause of the additional
assessment: 

  -- A tax liability resulting from an omission of gross income must
     exceed $500. 

  -- A tax liability resulting from a deduction, credit, or basis
     that has no basis in fact or law must exceed $500 and also be in
     excess of certain income levels.\3 If the innocent spouse has
     remarried, the new spouse's income is included in this
     calculation whether or not they file a joint return. 

The following case histories illustrate the types of situations that
IRS and taxpayers confront when applying these standards: 

  -- A taxpayer learned of an assessment of over $3,000 against a
     1985 joint return when IRS levied her wages in 1992.  The
     assessment was generated primarily by her ex-husband's
     disallowed business and moving expenses, although he also had
     some unreported income.  The taxpayer submitted documentation
     demonstrating that the unreported income was generated by her
     husband and received relief for about $200.  According to an IRS
     official, she could not substantiate her husband's disallowed
     business expenses and was held liable for the remainder of the
     tax. 

  -- A taxpayer's ex-husband, a wanted fugitive, had not paid the tax
     reported for 2 tax years.  The taxpayer remarried, and IRS
     placed liens against her new husband's property.  IRS denied
     innocent spouse relief.  This was in part because the liability
     was for taxes reported on the joint return rather than taxes
     assessed after the return was filed; that is, there was an
     underpayment.  IRS did accept an Offer in Compromise for both
     years and for a third year where the ex-husband had failed to
     report income. 

  -- In 1995, a taxpayer wrote to IRS to protest taxes due on 3 joint
     returns that were attributable to income derived from her
     ex-husband's fraudulent activities.  In 1996, IRS informed the
     taxpayer she was not eligible for innocent spouse relief for 2
     tax years because these balances were for taxes reported as due
     on the original returns but not paid when the returns were
     filed.  However, IRS staff informed the taxpayer they would
     consider innocent spouse relief for 1 year if the taxpayer could
     demonstrate she had no knowledge of the unreported income.  She
     submitted third-party statements that she did not live a lavish
     or enhanced lifestyle as well as copies of police records on her
     ex-husband's arrest and trial.  IRS eventually granted innocent
     spouse relief for that 1 year. 

  -- A taxpayer learned of an assessment of about $1,200 on joint
     returns for 2 years when IRS seized her 1995 tax refund.  The
     assessment was generated by her ex-husband's unreported income. 
     The taxpayer argued that the couple had maintained separate
     checking and savings accounts, and therefore she did not know of
     the unreported income.  Furthermore, the divorce decree
     specified that her ex-husband would be responsible for
     outstanding tax debts incurred during the marriage.  IRS denied
     innocent spouse relief for 1 year because the additional tax
     assessment for that year was less than the $500 threshold.  IRS
     denied innocent spouse relief for the other year because the
     taxpayer did not meet the knowledge requirement.  Because the
     unreported income was more than 75 percent of the ex-husband's
     total income, IRS staff believed she should have been aware of
     the income earned even though the spouses had separate accounts. 

  -- A taxpayer was assessed over $3,000 on joint returns filed in 4
     tax years generated by her husband's disallowed deductions for
     gambling losses.  She was denied innocent spouse relief for 1
     year because the additional tax assessment for that year was
     less than the $500 threshold.  She was denied innocent spouse
     relief for the other 3 years because the additional tax
     assessment in each of those years was less than 25 percent of
     her adjusted gross income. 


--------------------
\3 These income levels are (1) 10 percent of the innocent spouse's
adjusted gross income for their preadjustment tax year if the
taxpayer's income is less than or equal to $20,000; or (2) 25 percent
of the innocent spouse's income if the taxpayer's income is greater
than $20,000. 


   ESTIMATED UNIVERSE OF POTENTIAL
   INNOCENT SPOUSES
-------------------------------------------------- Chapter STATEMENT:2

Because IRS did not have data on the number of innocent spouse
requests filed, we developed an estimate of the potential universe of
innocent spouses by analyzing data relating to the 1.2 million joint
returns which were assessed additional taxes under IRS' 1992 audit
and underreporter programs.  Of these 1.2 million returns, about
587,000 had additional tax assessments exceeding $500, which is the
minimum dollar threshold required for innocent spouse relief. 

However, our estimate of 587,000 couples represents the maximum
number of taxpayers potentially eligible for innocent spouse relief. 
This is more than would probably actually qualify.  For instance,
some couples were probably assessed additional taxes as a result of
overstated deductions, credits, or basis, which have other dollar
thresholds in addition to the $500 threshold.  Further, some of the
587,000 couples may not have qualified for innocent spouse protection
because they both knew there was a substantial tax understatement. 
This knowledge would have made them ineligible for relief even if the
tax deficiency was solely attributable to the actions of one spouse. 

Since divorced taxpayers seek innocent spouse relief most frequently,
we also estimated the number of taxpayers who could potentially be
eligible for relief and may have divorced during the 3 years since
the 1992 joint returns were filed.  Using a 2-percent per year
divorce rate, we estimated that 35,000 divorced taxpayers had
additional tax assessments of more than $500. 


   INFORMATION AVAILABLE ON
   APPLYING FOR INNOCENT SPOUSE
   RELIEF WAS LIMITED
-------------------------------------------------- Chapter STATEMENT:3

Although innocent spouse relief is clearly established in law and
regulation, we observed that little information about the criteria
for granting it or how to apply for it was available from IRS.  The
innocent spouse relief provisions are described in several IRS
publications, but these publications do not provide any guidance on
how to request relief.  Furthermore, these publications are developed
to help taxpayers prepare their returns, which is far in advance of
the time that taxpayers might need information on innocent spouse
relief.  Moreover, the publications most directly related to the
enforcement and collection procedures that apply when taxpayers are
billed for their spouses' taxes are totally silent about innocent
spouse relief. 

Because IRS lacked well-defined procedures for taxpayers to request
innocent spouse relief, the taxpayers involved in the innocent spouse
cases we reviewed resorted to existing avenues that were designed to
resolve other types of problems.  In most cases, we found that either
the taxpayers or their representatives had (1) contacted Problem
Resolution Offices, which were established to assist taxpayers who
cannot resolve their problems through normal IRS channels; or (2) had
requested relief through an Offer in Compromise, which is used in the
cases of taxpayers who cannot pay the full amount of the balance due
and decide to offer a lesser amount.  The fact that taxpayers are
commonly using these two approaches to seek innocent spouse relief
indicates to us that IRS does not provide taxpayers with adequate
guidance for seeking relief. 

Some IRS staff are as confused as taxpayers about how to request
innocent spouse relief.  The various IRS units we contacted took
different approaches to providing relief.  For example, two district
offices granted relief using Offers in Compromise based on doubt as
to liability, while staff at one service center routinely denied such
requests as inappropriate. 


   MODIFYING TAX CODE PROVISIONS
   COULD ALLOW MORE TAXPAYERS TO
   QUALIFY FOR RELIEF
-------------------------------------------------- Chapter STATEMENT:4

The current provisions may not ensure that taxpayers receive
equitable relief.  For example, the dollar thresholds represent
eligibility criteria for relief based on income or the size of the
liability.  These criteria appear to be more related to an ability to
pay or degree of hardship than to the innocence of the taxpayer.  The
logic behind the income thresholds is particularly cloudy because the
potential innocent spouse's income is based on the tax year ending
before the notice of deficiency (which may be several years after the
tax year of the joint return) and must include the income of any new
spouse.  Finally, the dollar thresholds prevent taxpayers with
smaller liabilities from obtaining relief.  Since the minimum
understatement of tax in all cases must be more than $500, lower
income taxpayers could be precluded from obtaining relief.  We
estimated that if the dollar thresholds were eliminated, the maximum
number of couples filing tax year 1992 returns potentially eligible
for innocent spouse relief would have been 1.2 million, which consist
of all couples who were assessed additional taxes under IRS' audit
and underreporter programs. 

Also, under the current provisions, spouses can receive relief if
deductions, credits, or basis have absolutely no basis in fact or
law, but not if they are simply erroneous.  The distinction between a
deduction having no basis in fact or law versus its just being
erroneous is difficult to comprehend and can lead to various
interpretations by IRS and the courts.  This problem is compounded by
the fact that IRS' regulations governing innocent spouse relief were
issued in 1974 and have not been updated to incorporate more recent
changes to the provisions. 

The "knowledge" factor is perhaps the most subjective element in the
current innocent spouse provisions.  For someone to prove that they
did not know and had no reason to know of a financial transaction
undertaken by his or her spouse would generally be difficult, if not
impossible.  IRS and the courts consider circumstantial factors, such
as education, involvement in the family's financial affairs, and
lifestyle, in assessing this contention.  For example, one indicator
that IRS uses to determine if spouses were aware of the tax avoidance
is whether they benefited by living a lifestyle significantly better
than could be supported by the reported income.  However, according
to critics, determining whether a taxpayer's lifestyle was
significantly better because of the tax avoidance is fairly
subjective and the courts have interpreted the criteria differently. 


   POTENTIAL IMPACT OF REPLACING
   THE JOINT AND SEVERAL LIABILITY
   STANDARD WITH PROPORTIONATE
   LIABILITY
-------------------------------------------------- Chapter STATEMENT:5

One way to ensure that taxpayers are not held liable for their
spouses' taxes would be to replace the joint and several liability
standard with a proportionate liability standard.  Under
proportionate liability, taxpayers would be held responsible only for
the taxes generated by their own individual incomes and assets or,
for taxpayers living in community property states, for the tax
associated with one-half of the community income.  We identified
three options for administering a proportionate liability standard. 
The options are to (1) eliminate joint returns and require all
taxpayers to file separately, (2) retain joint returns but modify
them so that each spouse's income and deductions are reported in
separate columns (this is called front-end proportionality), and (3)
retain the current joint return requirements but apply proportionate
liability only in cases where there are delinquent taxes or
subsequent tax assessments (this is called back-end proportionality). 

We evaluated the potential effects of these options on IRS' tax
administration processes and taxpayers' burden.  Table 1 shows the
pros and cons of the three options for taxpayers and IRS. 



                                Table 1
                
                 Pros and Cons of Different Methods of
                Administering a Proportionate Liability
                                Standard

                  Separate return   Modified joint    Current joint
Entity            option\a          return option\b   return option\c
----------------  ----------------  ----------------  ----------------
Taxpayers

Pros              If divorced,      If divorced,      No additional
                  individual        individual        paperwork
                  liability is      liability is      burden.
                  more clearly      more clearly
                  established.      established.
Cons
                  Must prepare two  Must allocate     Must establish
                  returns but       joint income,     individual
                  receive limited   deductions, and   liability if
                  or no benefit     credits but       additional taxes
                  while married.    receive limited   assessed.
                                    or no benefit
                                    while married.

                  May have a        May have a
                  higher tax        higher tax
                  liability.        liability.

IRS

Pros              Individual        Individual        No additional
                  liability more    liability more    return-
                  clearly           clearly           processing
                  established.      established.      costs.

Cons              Increased costs   Might increase    Must establish
                  for processing    costs for keying  individual
                  up to twice as    additional data   liability if
                  many returns for  into computer     additional taxes
                  married           systems.          assessed.
                  couples.

                  Increased         Increased
                  difficulty in     difficulty in
                  matching income   matching income
                  reported on       reported on
                  returns to        returns to
                  information       information
                  returns.          returns.          Increased
                                                      collection costs
                  Increased         Increased         because IRS
                  collection costs  collection costs  would have to
                  because IRS       because IRS       collect from
                  would have to     would have to     each taxpayer.
                  collect from      collect from
                  each taxpayer.    each taxpayer.
----------------------------------------------------------------------
\a Each spouse files separate return. 

\b Income split out separately on joint return. 

\c Proportionate income only for returns with unpaid taxes or
subsequent tax assessments. 

Source:  GAO's analysis of three proportionate liability options. 

As shown in the table, these options represent trade-offs between
clearly establishing each taxpayer's liability on their tax returns
and the amount of paperwork and administrative burden created for
taxpayers and IRS. 


   BINDING IRS TO DIVORCE DECREES
   WOULD BE IMPRACTICAL
-------------------------------------------------- Chapter STATEMENT:6

Divorcing couples may specify in their divorce decrees how future
liabilities resulting from their prior joint returns are to be
handled, such as one spouse is entirely liable, both spouses are
equally liable, or some other permutation.  However, IRS is not bound
by these divorce decrees because it is not a party to the decree. 

We found that a legislative change to bind IRS to divorce decrees
appears impractical for two major reasons.  First, current federal
law provides no mechanism whereby IRS can be a party to divorce
proceedings.  Federal tax matters are the exclusive jurisdiction of
the federal courts.  Divorce matters, however, are generally handled
by state courts.  Federal courts have traditionally refused to
consider any legal action involving divorce.  Thus, providing a legal
forum where IRS and the parties to a divorce could resolve issues
relating to both tax matters and divorce proceedings would require a
fundamental and extensive change in either federal tax law or state
domestic relations law. 

Second, binding IRS to divorce decrees could require IRS to become
involved in every divorce settlement or trial.  In 1994, about 1.2
million divorce decrees were granted in the United States.  To be a
party to this many legal proceedings nationwide each year would
create a significant administrative burden for IRS. 

IRS officials also believe the number of appeals would increase
because divorce decrees can be lengthy and complex documents that are
open to more than one interpretation.  Furthermore, IRS officials
fear that divorce decrees would be manipulated to thwart its
collection efforts.  For example, one spouse might retain sole
ownership of the couple's residence, the couple's major asset, while
the spouse without assets takes responsibility for the taxes.  Thus,
IRS would not be able to place a lien against the residence to force
collection action for any delinquent taxes. 


   IRS FOLLOWS STATE PROPERTY LAWS
   IN COLLECTING PREMARITAL TAX
   DEBTS
-------------------------------------------------- Chapter STATEMENT:7

About 13 million, or 27 percent, of all taxpayers who filed joint
returns in 1992 lived in community property states.  Some of these
taxpayers may have been held financially responsible for tax
liabilities incurred by their spouses before their marriage, which
they would not have been if they lived in a common law state.  This
disparate treatment between taxpayers residing in community property
states versus those living in common law states occurs because IRS,
as with other creditors, follows state law in classifying married
couples' rights in property. 

Because the income, including wages, of taxpayers living in certain
community property states is considered community property, IRS can
place a levy on the wages or other separate income of either spouse
to satisfy an existing tax debt, even if that tax debt was incurred
by the other spouse before their marriage.  In contrast, IRS cannot
place a levy on the separate income of one spouse to pay the taxes
due from the other spouse in a common law state.  Once the income of
either spouse is placed in a joint account it would be subject to IRS
seizure in both community property and common law states. 

According to IRS officials, the agency does not have specific
procedures for placing levies on a spouse's income for premarital
taxes incurred by the other spouse.  Officials told us that under
IRS' collection procedures, levy action is generally to be taken
against the individually held income.  For example, wages of the
taxpayer who incurred the tax debt or any jointly held income, such
as an interest-bearing account, may be levied but not the separate
income of the other spouse. 


   TREASURY'S REPORT PARALLELS OUR
   ADMINISTRATIVE RECOMMENDATIONS
-------------------------------------------------- Chapter STATEMENT:8

Treasury's February 1998 report indicates that IRS is currently
undertaking a number of actions to improve the administration of the
current innocent spouse provisions.  Several of these actions were
recommended in our March 1997 report and will include: 

  -- issuing a new form to assist taxpayers in preparing claims for
     innocent spouse relief,

  -- processing the new form in one central location to ensure
     greater consistency in evaluating the claims,

  -- developing training courses on the innocent spouse provisions
     for collections and examination personnel, and

  -- revising tax form instructions and other publications to make
     innocent spouses more aware of the relief available to them. 

Other actions Treasury reports IRS to be undertaking include: 

  -- reviewing current training materials to ensure that they stress
     the responsibilities of IRS employees to identify situations
     where innocent spouse provisions might apply, even where the
     taxpayer does not know of the provisions,

  -- making telephone assistors, specially trained in innocent spouse
     provisions, available to answer questions from taxpayers
     received through IRS' toll free telephone system, and

  -- conducting outreach to community organizations that serve abused
     and battered spouses to identify those who might qualify for
     innocent spouse relief. 

We believe these administrative actions if implemented effectively
should make more taxpayers aware of their rights under the innocent
spouse provisions and provide for more consistent application of the
provisions by IRS employees. 

Treasury's report made three statutory recommendations.  One dealt
with making it easier to qualify for innocent spouse relief by
changing statutory standards to help additional taxpayers, including
those with smaller tax liabilities who are presently ineligible for
relief.  These changes would include lowering or eliminating the
income thresholds, allowing underpayment as well as understatement of
taxes to be covered by the provisions, and eliminating the "no basis
in fact or law" requirement for erroneously claimed deduction,
credit, or basis, which would put these items on the same footing as
omissions from income.  While we did not recommend any of these
changes, our report did point out similar problems with these
provisions. 

Treasury recommended two other statutory changes that would help
taxpayers.  One would allow the Tax Court to review IRS denials of
innocent spouse claims, and the other would suspend collection
actions against one spouse when the other is contesting a proposed
assessment in Tax Court. 


   SUMMARY
-------------------------------------------------- Chapter STATEMENT:9

In summary, Madame Chairman, we found that the existing innocent
spouse provisions are complex, difficult to understand, and pose a
serious challenge for IRS and taxpayers.  In addition, they result in
the inequitable treatment of taxpayers.  There are both
administrative and statutory options for improving the innocent
spouse provisions.  On the administrative level, we have made
recommendations, which are echoed in the Treasury report.  If the
recommendations are properly implemented, they would put both
taxpayers and IRS employees in a better position to understand and be
in compliance with the provisions.  We believe these improvements
should be undertaken regardless of whether there are changes made to
the statute. 

On the statutory level, repeal of the qualifying thresholds and
inclusion of erroneous deductions and underpayment as well as
understatement of tax could make the provisions less complex and more
equitable. 

Finally, there is the issue of replacing the joint and several
liability standard with a proportionate liability standard.  While
there are several alternatives for doing this, each represents
trade-offs between establishing individual taxpayer liability on a
tax return and the amount of paperwork and administrative burden
created for taxpayers and IRS. 


------------------------------------------------ Chapter STATEMENT:9.1

This concludes our prepared statement.  We would be pleased to answer
any questions. 


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