OAR 150-316-0440: Innocent Spouse, Separation of Liability, and Equitable Relief Provisions

(1) Internal Revenue Service (IRS) Determination Made to Grant Relief. The department will grant relief from liability for tax under ORS 316.369 if the person seeking relief provides proof that the IRS has made a determination under IRC §6015 that relieved the person of liability for federal taxes for the same tax year. As soon as the determination is made regarding the request for relief, the department will send a letter to each spouse informing them of the department’s determination. (2)(a) No IRS Determination Made or IRS Denied Relief. A taxpayer who has filed an Oregon joint return may seek relief from liability by applying to the Department of Revenue even if the taxpayer has not applied for relief to the IRS. Or, if the IRS has denied relief, the taxpayer may ask the department to make a separate determination for relief from state liability. To request innocent spouse relief under the provisions of section (4), allocation of liability under the provisions of section (5), or equitable relief under the provisions of section (6), the taxpayer must write a letter to the department that includes the taxpayer's name, address, Social Security number, the taxpayer's spouse's (or former spouse's) name and Social Security number, the tax years for which the taxpayer is requesting relief for, and the type of relief the taxpayer is requesting. The department will treat the request for relief from liability as also constituting a request for any applicable refund. A taxpayer may file a request for innocent spouse relief, allocation of liability, or equitable relief with the department at any time. There is no statute of limitation on requesting relief under these provisions. (b) The department will send a letter to the nonrequesting spouse if relief is requested from joint and several liability on a joint return and will allow the nonrequesting spouse to submit information related to the determination of the request for relief from liability. As soon as the determination is made regarding the request for relief, the department will send a letter to each spouse informing them of the department’s determination. (3) Definitions. For purposes of this rule: (a) Understatement of Tax. An understatement of tax generally is the difference between the total amount of tax that should have been shown on the taxpayer's Oregon return and the amount of tax that actually was shown on the Oregon return. This includes a deficiency that arises in the original processing of the return and a deficiency due to an audit. (b) Erroneous Items. Erroneous items include unreported income and an incorrectly reported deduction, credit, or basis. Unreported income is any gross income item the spouse of the requesting taxpayer received but did not report. An incorrectly reported deduction, credit, or basis is any improper deduction, credit, or property basis the spouse of the requesting taxpayer claims. (c) Spouse. All references to spouse mean the spouse on the joint return for which relief is requested. (4) Innocent Spouse. Innocent spouse relief is available only for deficiencies or assessed deficiencies. This provision does not authorize relief from liabilities that taxpayers reported properly on the joint return but did not pay. If the following four conditions are met, the individual will qualify for innocent spouse relief. The department will relieve the individual of state liability for tax in whole or in part (including interest, penalties, and other amounts) for the taxable year. (a) Conditions: (A) The requesting spouse filed a joint return for the taxable year for which relief is sought; (B) On such return there is an understatement of tax attributable to erroneous items of the spouse with whom the requesting spouse filed the return; (C) The requesting spouse establishes that he or she did not know, and had no reason to know, of the understatement when signing the return; (D) Taking into account all of the facts and circumstances, it is unreasonable in the department’s judgment to hold the requesting spouse liable for the deficiency attributable to the understatement. (b) If the taxpayer seeking relief asks for a refund of state tax payments, the taxpayer also must provide proof that he or she made the payments to the Oregon Department of Revenue. If the department grants relief, it will refund payments made by the requesting spouse according to the procedures and refund limitations of ORS 305.270 and 314.415. This applies to any requests for relief received by the department on or after August 1, 2004. (5) Allocation of liabilities for taxpayers no longer married, legally separated, or no longer living together. Relief is available only for deficiencies or assessed deficiencies. This provision does not authorize relief from liabilities that taxpayers reported properly on the joint return but did not pay. (a) An individual may apply to allocate a deficiency if the following two conditions are met: (A) The requesting spouse filed a joint return for the taxable year for which relief is sought; and (B) At the time of the request, the requesting spouse is no longer married to, is legally separated from, or has not been a member of the same household as the other spouse at any time during the 12-month period ending on the filing date of the request. (b) Relief under allocation of liability is subject to several limitations: (A) A request will be denied if assets were transferred between the requesting spouse and the other spouse as part of a fraudulent scheme. (B) Relief is not available if the department can demonstrate that the requesting spouse had actual knowledge when he or she signed the return of an item that gave rise to a deficiency. (C) Relief will only be available if the liability exceeds the value of any disqualified assets (as defined in Internal Revenue Code §6015(c)(4)(B)) transferred to the requesting spouse by the nonrequesting spouse. (D) The department will not refund payments made by the requesting spouse on the liability for which relief was granted if those payments were made before relief was granted. This applies to any requests for relief the department receives on or after August 1, 2004. (6) Equitable relief. Equitable relief is available for unpaid liabilities that were reported properly on the joint return and for understatements of tax. (a) To be eligible for equitable relief, all of the following conditions must be satisfied: (A) The requesting spouse filed a joint return for the taxable year for which relief is sought; (B) Relief is not available under either the innocent spouse or allocation of liability provisions; (C) No assets were transferred between the spouses filing the joint return as part of a fraudulent scheme by the spouses; (D) There were no disqualified assets transferred to the requesting spouse by the other spouse; and (E) The requesting spouse did not file the return with fraudulent intent. (b) The department will grant equitable relief generally in cases where all of the following elements are satisfied: (A) At the time relief is requested, the requesting spouse is no longer married to the other spouse, or is legally separated from the other spouse, or has not been a member of the same household as the other spouse at any time during the 12-month period ending on the date relief was requested; (B) When the requesting spouse signed the return, the requesting spouse had no knowledge or reason to know that the tax would not be paid; and (C) The requesting spouse will suffer economic hardship if relief is not granted. The department will determine economic hardship by taking into account all of the facts and circumstances concerning the requesting spouse's financial situation, including but not limited to: (i) Ability to pay now and in the future; (ii) Personal assets such as stocks, bonds, dividends, retirement accounts, automobiles, equipment, etc.; (iii) Ability to borrow funds; (iv) Financial statements provided by the taxpayer; and (v) Any other financial information that the department requests. (c) The following is a partial list of the positive and negative factors that the department will take into account in determining whether to grant relief. No single factor will be determinative of whether equitable relief will or will not be granted in any particular case. All factors will be considered and weighed appropriately. The list includes but is not limited to the following: (A) Factors in favor of relief. (i) Marital status. The requesting spouse is separated (whether legally separated or living apart) or divorced from the nonrequesting spouse. (ii) Economic hardship. The requesting spouse would suffer economic hardship if relief from liability is not granted. (iii) Abuse. The requesting spouse was abused by the nonrequesting spouse, but such abuse did not amount to duress. (iv) No knowledge or reason to know. In the case of a liability that was properly reported but not paid, the requesting spouse did not know and had no reason to know that the liability would not be paid. In the case of a liability that arose from a deficiency, the requesting spouse did not know and had no reason to know of the items giving rise to the deficiency. (v) Other spouse's legal obligation. The other spouse has a legal obligation as part of a divorce decree or agreement to pay the outstanding liability. This will not be a factor weighing in favor of relief if the requesting spouse knew or had reason to know, when the divorce decree or agreement was entered into that the other spouse would not pay the liability. (vi) Attributable to the nonrequesting spouse. The liability for which relief is sought is solely attributable to the nonrequesting spouse. (B) Factors weighing against relief. (i) Attributable to the requesting spouse. The unpaid liability or item giving rise to the deficiency is attributable to the requesting spouse. (ii) Knowledge or reason to know. When the requesting spouse signed the return, the requesting spouse knew or had reason to know of the item giving rise to a deficiency or that the reported liability would not be paid. (iii) Significant benefit. The requesting spouse has significantly benefited from the unpaid liability or items giving rise to the deficiency. (iv) Lack of economic hardship. The requesting spouse will not experience economic hardship if relief from the liability is not granted. (v) Noncompliance with Oregon income tax laws. The requesting spouse has not made a good faith effort to comply with Oregon income tax laws in the tax years following the tax year or years to which the request for relief relates. (vi) Requesting spouse's legal obligation. The requesting spouse has a legal obligation as part of a divorce decree or agreement to pay the liability. If, taking into account all the facts and circumstances, the department determines that it would be unreasonable, in the department’s judgment, to hold the requesting spouse liable for the liability, the department may relieve a requesting spouse of all or part of the joint liability. (d) If the taxpayer seeking relief asks for a refund of state tax payments, the taxpayer also must provide proof that he or she made the payments to the Oregon Department of Revenue. If the department grants relief, it will refund only payments the requesting spouse made after the request for relief was filed with the department. Refunds are subject to the refund procedures and limitations of ORS 305.270 and 314.415. This applies to any request for relief the department receives on or after August 1, 2004. (7) Appeal Rights. If the department denies the relief requested under any of the provisions described above, the department will send the requesting spouse a conference decision letter that will have appeal rights. To appeal the conference decision, the requesting spouse must file an appeal with the Magistrate Division of the Oregon Tax Court within 90 days of the date of the conference decision letter. Whether or not relief was granted, the nonrequesting spouse can not appeal the determination. (8) Time Period For Requesting Relief. A taxpayer may request relief from liability for tax at any time. There is no statute of limitation on requesting relief. However, the department will not grant relief under any provision of ORS 316.369 if the requesting spouse has entered into a closing agreement or settlement agreement with the department or if the year at issue has been litigated at the Oregon Tax Court, and the requesting spouse was a party to the litigation. (9) Relief provided under ORS 316.368. If the requesting spouse does not qualify for relief under 316.369, the department will determine if relief can be granted under 316.368.