The Tax Court denied an attempt by the breadwinner to obtain innocent spouse relief for tax liabilities in the case of Soler v. Commissioner.[1]  And the case also contains a warning for spouses who may prefer to not get involved in tax matters in the marriage when their spouse happens to be an accountant.

Facts of the Case

The Tax Court begins with a discussion of the background of the spouses in this case:

Mrs. Soler is married to and resides with her husband, Carlos Soler, the nonrequesting spouse. Mr. and Mrs. Soler have been married for over 25 years, have two children together, and have never been legally separated.

Mrs. Soler is the primary income earner for her household. At the time of trial, Mrs. Soler was employed as a manager and earned an annual salary of $160,000. She has a two-year associate’s degree in fashion design and worked as a clothing designer during the 2012 through 2015 tax years. Mr. Soler has a bachelor’s degree in accounting and was primarily a stay-at-home father during the 2012 through 2015 tax years. Mr. Soler also operated a consulting business during tax years 2012, 2013, and 2014 and a real estate business during tax years 2013 and 2014.[2]

The returns in question are detailed as follows:

The Solers timely and jointly filed Form 1040, U.S. Individual Income Tax Return, for each year at issue. The returns were prepared by Mr. Soler and were signed by both Mr. and Mrs. Soler.

Mr. Soler reported the income and expenses of his consulting and real estate businesses on separate Schedules C, Profit or Loss From Business. For tax year 2012 the consulting Schedule C reported gross receipts of $16,340 and a net loss of $8,109. For tax year 2013 the consulting Schedule C reported no gross receipts and a net loss of $5,103, and the real estate Schedule C reported no gross receipts and a net loss of $7,420. For tax year 2014 the combined Schedules C reported no gross receipts, but Mr. Soler reported a net Schedule C profit of $1,762 on his Schedule SE, Self-Employment Tax.[3]

The couple’s interactions with the IRS began with an examination of the taxpayers’ 2013 income tax returns:

On April 29, 2015, the Internal Revenue Service (IRS) informed Mr. and Mrs. Soler via letter that their 2012 income tax return was being examined. The letter identified issues with the Schedule C gross receipts and with various deductions for reported expenses. An IRS Revenue Agent (RA) scheduled an initial interview with Mr. Soler on May 14, 2015. When the RA arrived at the Solers’ apartment for the interview, Mrs. Soler answered the door, told the agent that Mr. Soler was ill, and requested that the meeting be rescheduled. On May 20, 2015, the RA and Mr. Soler rescheduled the initial interview for May 29, 2015. During that conversation, Mr. Soler asked whether Mrs. Soler was required to be present at the interview, and the RA told Mr. Soler that she was welcome but not obligated to be there.[4]

The IRS later expanded the exam to include their 2013 and 2014 income tax returns:

On June 10, 2015, the RA mailed separate letters to Mr. and Mrs. Soler informing them that their 2013 income tax return was also being examined. However, the letter addressed to Mr. Soler was later returned as undeliverable. On August 12, 2015, the RA opened an examination of the Solers’ 2014 return.[5]

Finally, the Tax Court describes the results of the exam:

On November 13, 2015, respondent mailed separate letters and Forms 4549-A, Income Tax Examination Changes, to Mr. and Mrs. Soler for the 2012, 2013, and 2014 tax years. Respondent later issued a notice of deficiency to Mr. and Mrs. Soler for tax years 2012, 2013, and 2014 that determined a deficiency in tax and a section 6662 accuracy-related penalty for each year. The Solers did not dispute the notice of deficiency by filing a petition with this Court, and respondent assessed the proposed deficiencies and penalties. [6]

In addition, the IRS’s income matching program uncovered a problem with the Solers’ 2015 return:

The IRS performed an income-matching examination of the Solers’ 2015 tax return and determined that the 2015 return failed to include in income distributions from Mr. and Mrs. Soler’s qualified retirement accounts of $6,000 and $23,000, respectively. Respondent issued a notice of deficiency to Mr. and Mrs. Soler for the 2015 tax year determining a deficiency in tax and a section 6662 accuracy-related penalty. The Solers did not petition the Court with respect to this notice, and respondent assessed the proposed deficiency and penalty.[7]

In 2018 Ms. Soler filed for innocent spouse relief with the IRS:

On February 20, 2018, respondent received a timely Form 8857, Request for Innocent Spouse Relief, from Mrs. Soler, requesting relief from joint and several liability for tax years 2012, 2013, 2014, and 2015 pursuant to section 6015(b), (c), and (f). In her request for relief Mrs. Soler claimed that she was unaware of any income tax liabilities until the IRS began levying against her wages. Mrs. Soler also claimed that she believed Mr. Soler was unemployed during the years at issue and had no income.[8]

The IRS denied her request for relief in May of 2018 and Ms. Soler filed an administrative appeal of this decision with the IRS:

On June 19, 2018, Mrs. Soler submitted Form 12509, Innocent Spouse Statement of Disagreement, appealing respondent's preliminary determination, and her case was assigned to the IRS Office of Appeals (Appeals). Mrs. Soler appended a letter to her Form 12509, in which she disagreed with three of the preliminary determination's conclusions: (1) that she had knowledge or reason to know of the items that caused the understatements of tax; (2) that she would not experience financial hardship if relief were denied; and (3) that it would not be unfair to hold her liable for the unpaid liabilities.[9]

Ms. Soler’s reasons she believed her appeal should be sustained were summarized as follows:

In her letter to Appeals, Mrs. Soler acknowledged that she was aware that her income was not enough to pay all of the household expenses during the years at issue. However, she believed the gap between her income and the family’s expenses was being bridged by gifts from Mr. Soler’s mother. Mrs. Soler argued that she relied on Mr. Soler to handle all of the family finances and tax returns, and she did not have any reason to believe that there was an issue until the IRS began levying against her wages. Mrs. Soler submitted some household bills and bank statements in support of her contention that she would experience financial hardship if relief was not granted. However, the bank statements, which are for Mrs. Soler’s personal checking account from October 29, 2014, through December 29, 2015, showed that Mrs. Soler regularly paid household bills from the account.[10]

Appeals denied Ms. Soler’s request for relief. Appeals’ reasons for the decision are summarized in the opinion as follows:

Appeals determined that Mrs. Soler did not qualify for relief under section 6015(b) because she had knowledge or reason to know of the understatements of tax when she signed the returns. Appeals further determined that Mrs. Soler did not qualify for relief under section 6015(c) because she did not meet the marital status requirement. Lastly, Appeals determined that, although Mrs. Soler met the threshold requirements for relief under section 6015(f), no relief would be granted because Mrs. Soler did not meet the requirements for streamlined relief, she had knowledge or reason to know of the understatements of tax when the returns were filed, and she did not demonstrate that she would experience economic hardship if relief was not granted.[11]

Ms. Soler filed a petition with the Tax Court challenging this decision of Appeals against the grant of relief.

Relief Under IRC §6015(b)

IRC §6015(b)(1) provides:

(b) Procedures for relief from liability applicable to all joint filers.

(1) In general. Under procedures prescribed by the Secretary, if--

(A) a joint return has been made for a taxable year;

(B) on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return;

(C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement;

(D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and

(E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election,

then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement.

The opinion notes that the only item in dispute for qualification for §6015 relief in this case was whether Ms. Soler knew or had reason to know about the understatement:

The only requirements that are disputed by the parties are whether Mrs. Soler had knowledge or reason to know of the understatements at the time she signed the returns for the years at issue and whether it is inequitable to hold her liable for the deficiency. Mrs. Soler and the nonrequesting spouse filed a joint return for each year at issue, and the portions of the deficiencies that arise from the Schedule C businesses in tax years 2012 through 2014 and from Mr. Soler’s retirement account distribution in 2015 are attributable to the nonrequesting spouse.

To be eligible for relief under section 6015(b), the requesting spouse must establish that he or she did not know and had no reason to know of the understatement on the return at the time he or she signed it. A taxpayer has knowledge or reason to know of an understatement if he or she actually knew of the understatement or if a reasonable person in similar circumstances would have known of the understatement. Treas. Reg. § 1.6015-2(c).[12]

In this case, the IRS conceded that Ms. Soler did not know about the understatements in question when she signed the returns.  But the IRS argued that Ms. Soler had reason to know about the understatements.  Had acted reasonably given the information she was aware of, taking into account her education and background, she would have become aware of the issues, so her ignorance of the understatement was primarily due to her own failure to take reasonable steps to understand and review the returns she signed.

The opinion reviews the standard the Court uses to see if the requesting spouse had reason to know about the understatements:

A taxpayer has reason to know of an understatement if a reasonable person in similar circumstances could be expected to know that there was an understatement or that further investigation was warranted. Butler, 114 T.C. at 283; Treas. Reg. § 1.6015-2(c). In determining whether a requesting spouse had reason to know of an understatement, we consider all of the facts and circumstances, including the requesting spouse’s level of education, the requesting spouse’s level of involvement in the family’s business and financial affairs, the presence of unusual or lavish expenses compared to the family’s past level of income and expenditures, and the nonrequesting spouse’s level of evasiveness or deceit regarding the family’s finances. Price v. Commissioner, 887 F.2d at 965; see also Treas. Reg. § 1.6015-2(c).

Because the relief provisions of section 6015 are “designed to protect the innocent, not the intentionally ignorant,” Dickey v. Commissioner, T.C. Memo. 1985-478, 50 T.C.M. (CCH) 1041, 1046, the reason to know test establishes a duty of inquiry on the part of the requesting spouse, Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), aff’g T.C. Memo. 1988-63; Butler, 114 T.C. at 283-84. A spouse who does not fulfill this duty may be charged with constructive knowledge of the understatement. Price v. Commissioner, 887 F.2d at 965; Porter, 132 T.C. at 212. The duty of inquiry arises when a spouse is aware of sufficient facts to place him or her on notice that an understatement may exist. Price v. Commissioner, 887 F.2d at 965.

A requesting spouse cannot satisfy the lack of knowledge requirement simply by claiming that he or she did not review the return at issue before signing it. A taxpayer who signs a return is generally charged with constructive knowledge of its contents. Porter, 132 T.C. at 211.[13]

Ms. Soler contends that she had no reason to know about the understatements:

Mrs. Soler contends that she did not have reason to know of the understatements on the dates she signed the returns. In her view she was an unsophisticated taxpayer who entrusted the family finances to Mr. Soler and did not participate in the Schedule C businesses. She further argues that Mr. Soler hid the existence of the bank accounts that he used for his Schedule C ventures and she, therefore, was not aware of enough facts to be put on notice that the understatements might exist. Accordingly, she contends that a reasonable person in her position would not have inquired any further into the returns than she did.[14]

Unfortunately, the Court did not find that she had acted reasonably given her knowledge and background for the returns under exam:

Mrs. Soler is college educated, was the primary income earner for her household during the years at issue, and had some regular involvement in the household finances. On the dates she signed the returns for 2012 through 2014, Mrs. Soler believed that Mr. Soler did not work and had no income. As a result, the mere attachment of Schedules C to the 2012, 2013, and 2014 returns would raise questions about the validity of the returns in the mind of a reasonably prudent person in Mrs. Soler's position. This is particularly true in view of the fact that Mrs. Soler knew that her income alone was not sufficient to pay all of her family's routine expenses. Additionally, the Schedules C that Mr. Soler completed showed net losses for tax years 2012 and 2013. The Solers were experiencing financial stress during the years at issue and were in the middle of a chapter 13 bankruptcy proceeding. Under those circumstances, a reasonably prudent person would certainly inquire about the loss-generating activity. Indeed, Mrs. Soler testified that, had she looked at the returns and noticed the reported losses, she would have asked her husband about them. However, even if Mrs. Soler did not actually review the returns, she is nonetheless charged with constructive knowledge of their contents because she signed them. Because Mrs. Soler did not fulfill her duty of inquiry, we conclude that she had reason to know of the understatements on the 2012, 2013, and 2014 tax returns.[15]

The Court also found she failed to act reasonably with regard to the 2015 return where the understatement was uncovered by the IRS income matching program:

Unlike the 2012, 2013, and 2014 understatements, the 2015 understatement arises from a failure to report as income on their 2015 tax return distributions that Mr. and Mrs. Soler took from their retirement accounts in 2015. Mrs. Soler claims that she did not review the 2015 return before signing it and was not aware that it contained an understatement. However, at the time Mrs. Soler signed the 2015 tax return, the IRS was examining the returns for 2012 through 2014 and had issued proposed adjustments for those years. Although Mrs. Soler chose not to participate in the audit, she admittedly knew that it was happening and even briefly spoke to the examining RA in May 2015. It is difficult to conceive of a more conspicuous notice that an understatement may exist or that some inquiry into the validity of a tax return is warranted than an audit of and proposed adjustment to the immediately preceding three years of tax returns. Because Mrs. Soler unreasonably and inexplicably failed to review the 2015 return, we conclude that she had reason to know of the understatement contained therein.[16]

Fundamentally, the fact that Ms. Soler was aware of the errors found in the prior 3 years returns prepared by Mr. Soler meant that Ms. Soler should have more carefully looked into the 2015 return for potential issues but failed to review the return at all before signing it.

Equitable Relief Under IRC §6015(f)

The Court also found that Ms. Soler did not qualify for equitable relief under IRC §6015(f).  IRC §6015(f)(1) provides:

(f) Equitable relief.

(1) In general. Under procedures prescribed by the Secretary, if--

(A) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either), and

(B) relief is not available to such individual under subsection (b) or (c),

the Secretary may relieve such individual of such liability.

In this case, the IRS found that the issues regarding her reason to know about the shortfalls that were fatal to IRC §6015(b) relief also strongly argued against equitable relief:

A spouse has reason to know of an understatement if a reasonable person in similar circumstances would have known that the return contained an understatement or that further investigation was warranted. Butler, 114 T.C. at 283; Treas. Reg. § 1.6015-2(c). The factors we consider in evaluating whether a requesting spouse had reason to know of an understatement include but are not limited to (1) the requesting spouse’s level of education; (2) the requesting spouse’s level of involvement in the activity giving rise to the understatement; (3) any deceit or evasiveness by the nonrequesting spouse; (4) the requesting spouse’s degree of involvement in business or household financial matters; (5) the requesting spouse’s business or financial expertise; and (6) any lavish or unusual expenditures compared with past spending. Rev. Proc. 2013-34, § 4.03(2)(c)(iii), 2013-43 I.R.B. at 402.

In evaluating whether Mrs. Soler qualified for relief under section 6015(b), we concluded that she had reason to know of the understatements for all years at issue because she failed to fulfill her duty of inquiry. See supra pp. 7-9. That same conclusion applies here. Consequently, we find that this factor weighs against granting relief.[17]

While other factors could serve to make the grant of equitable relief proper even with her knowledge, in this case the Court found only the fact Ms. Soler did not receive a significant benefit from the understatement to lean in favor of relief:

This factor weighs against relief when the requesting spouse received a benefit in excess of normal support due to the understatement or underpayment of tax. Id. § 4.03(e), 2013-43 I.R.B. at 402. If the requesting spouse enjoyed the benefits of a lavish lifestyle, such as purchasing luxury items or going on expensive vacations, this factor weighs against relief. If the requesting spouse did not receive a significant benefit from the understatement, this factor weighs in favor of relief. See Butner v. Commissioner, T.C. Memo. 2007-136, 93 T.C.M. (CCH) 1290. Nothing in the record suggests that Mrs. Soler enjoyed a lavish lifestyle as a result of the understatements at issue, and respondent concedes that Mrs. Soler did not receive any benefit beyond having her income tax reduced by the erroneous items. This factor weighs in favor of relief.[18]

But the Court found this factor did not weigh heavily enough in favor of relief to overcome the knowledge factor:

We conclude that the knowledge factor weighs heavily against granting relief. The significant benefit factor weighs slightly in favor of relief. While we do not base our decision on a simple tally of the factors, we conclude that five factors are neutral, one weighs slightly in favor of relief, and one weighs strongly against relief. After considering all the relevant facts and circumstances, we conclude that Mrs. Soler is not entitled to relief under section 6015(b) or (f).[19]

[1] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/wife-denied-relief-from-joint-tax-liabilities-with-husband/7dpzh?h=Soler (retrieved July 23, 2022)

[2] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[3] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[4] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[5] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[6] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[7] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[8] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[9] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[10] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[11] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[12] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[13] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[14] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[15] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[16] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[17] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[18] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022

[19] Soler v. Commissioner, TC Memo 2022-78, July 18, 2022