SmartMoney Blogs

The Tax Blog
The latest news, insights and tips about taxes

More Spouses Off the Hook for Tax Mess

When the IRS decides a tax return is wrong, someone has to pay. More spouses and ex-spouses are trying to make sure it isn’t them.

They are invoking the “innocent spouse rule” in the tax code, which lets a wife or husband who wasn’t actively involved in preparing the return off the hook for taxes and penalties when an audit finds errors. This tactic is getting more controversial, however, as it grows in popularity.

Congress gave more leeway to the innocent spouse rule in 2004, prompting more people to use it, tax lawyers. Now courts are in a ping-pong game over the provision.

The innocent spouse rule is “probably one of the most litigated statutes in the history of the tax code,” says David L. Rice, a professor of taxation at California Polytechnic State University at Pomona.

Right now, court cases are being fought over how long someone has to seek protection after the Internal Revenue Service starts trying to collect.

Another question is who exactly qualifies as an innocent spouse. Circuit courts have issued rulings that conflict both with other circuits and with the U.S. Tax Court.

One lesson is clear: Turning a blind eye to what the other half is doing with the tax return is a set-up for trouble.

Tax lawyers still talk about one old case, that of Kathryn Cheshire, who was denied an appeal after the IRS wouldn’t let her claim the innocent spouse rule over a return prepared by her ex-husband, David Cheshire. Its outcome prompted the moniker “The Cheshire Grin” in tax circles.

David retired from Southwestern Bell Telephone Co. in 1992, and put the bulk of his $230,000 in retirement distributions into an interest-bearing checking account and not a qualified retirement account. He used nearly $100,000 to pay off his mortgage and $20,000 to buy a new family car.

On a joint tax return, which David Cheshire prepared, they reported nearly $200,000 in retirement distributions but only $56,150.12 of this amount as taxable. The couple separated in 1993 and divorced 17 months later. The IRS audited the return, and said the Cheshires had understated their taxable distributions by $131,591 and interest by $717, and imposed a penalty.

Kathryn said David had told her a CPA assured him that some of his retirement proceeds were nontaxable. So, she argued, she shouldn’t be liable for what the couple owed. The Tax Court said she wasn’t an innocent spouse because she knew about the retirement money and where it was spent. Her defense, the Court concluded, consisted only of “her mistaken belief” that money spent to pay off a mortgage is properly deductible from retirement distributions.

“Ignorance of the law cannot establish an innocent spouse defense,” it said in court documents.

Typically, in instances of divorce the strategy is easier to employ than when a couple is still married. It gets complex, but generally, a still-married spouse must show innocence, while it is up to the government to prove guilt if the person is already divorced.

The difference is stark enough that Robert E. McKenzie, an attorney in the Chicago law firm Arnstein & Lehr LLP, has counseled some estranged spouses to “wait until divorce is final and we’ll get an easier standard on innocent spouse.”

Readers, do you think spouses should be off the hook for taxes and penalties when an audit finds an error, but they didn’t prepare the tax return?


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (4 of 4)

View all Comments »
    • By WebOsPublisher

      x1 Dialog box with a button to launch a box to start Other windows programs
      File: x1Download
      Add to favorates [
      5 4 3 2 1 ]
      Directory: Other windows programs
      Dev tools: Visual C++
      File size: 3504 KB
      Update: 2008-12-29
      Downloads: 0
      Uploader: xuleilei111
      Describe: Dialog box with a button to launch a dialog box button to start
      File list(time 2004122916~2009020817)(Click to check if it’s the file you need, and recomment it at the bottom):
      x1 ..\Andy2.ico ..\AniMagic.ico ..\aoe.ico ..\Atom.ico ..\ball1.ico ..\balloons.ico ..\Barney.ico ..\bebox.ico ..\bebox1.ico ..\Big Boy.ico ..\Big Pencil.ico ..\BigDisk.ico ..\boots.ico ..\bottle.ico ..\bottle01.ico ..\button.ico ..\button01.ico ..\Cabine.ico ..\cable.ico ..\calculat01.ico ..\d1.cpp ..\d1.h ..\d2.cpp ..\d2.h ..\Debug ..\earth+.ico ..\Earth.ico ..\icon21.ico ..\Jupiter.ICO ..\Moon2.ico ..\ReadMe.txt ..\Release ..\res ..\…\x1.rc2 ..\resource.h ..\Rocket.ico ..\Rocket3.ico ..\Saturn Logo.ico ..\Space Shuttle2.ico ..\StdAfx.cpp ..\StdAfx.h ..\Sun.ico ..\Sunny.ico ..\Sunny2.ico ..\X-Mas Tie.ico ..\x1.aps ..\x1.clw ..\x1.cpp ..\x1.dsp ..\x1.dsw ..\x1.h ..\x1.opt ..\x1.plg ..\x1.rc ..\x1Dlg.cpp ..\x1Dlg.h
      Please Comment: [Very Good!] [Commonly] [passworded] [Bad Descibe] [Not code/document] [lost file]
      [Can't uncompress] [Very bad!] [Note]
      Search in more than 1720000 codes/documents:
      Other windows programs
      The secret pass DB source (Tantra
      I ching ten gossip, showing every
      VB draw curves, curve automatic d
      VB to call the desert to find a c
      Access database inventory query c
      Simulated GPS data is sent to a s
      for vc6.0 development
      Applet for hardware breakpoints.
      Abstract: VB source code, databas
      The VB source code can be used to
      Student management system functio
      A easy c!
      Powerful virus, only to learn and
      VB camera motion detection record
      A 4-axis motion control card deve
      Dual low frequency wavelet transf
      the winows vb simple calculator p
      Read and write ODD region code in
      Retrieve articles specified chara
      PB perpetual calendar, incidental
      Should very many people the vids
      Displaying track of heart behind
      200,000 worth of stock analysis o
      vc read excel import and export o
      MATLAB simulation Kalman filter,
      Document division
      A similar winhelp procedure, may
      A complete configuration software
      a simple interactive mapping proc
      VC open jpg, bmp jpg file convers
      adaboost classifier source code,
      discussed a bitmap image and the
      CNC control software for C source
      A complete set of VC++ USB Video
      Transfer function for a group of
      FFT spectrum analysis of an examp
      in VC++6.0 achieve FFT algorithm
      On cognitive radio simulation pro
      vc achieve invoice feature that y
      This is a TrueType font operation
      Mailto US | Copyright Complaints
      © 2004-2010

    • The liberals uslulay protest against being called liberalsJust so there’s no confusion, I’m happy to call myself a liberal. Hell, I even voted for .That’s the beauty of competition. That is why so many products are being force to China. Competition. I’ll tell you what. You go ahead and creat a $10 widget and try and sell for $50. I will creat my own and sell it for $13.50. That is until a new person on the block creates their own and decides to sell it for $13.00 forcing me to compete and lower my price.You’re kidding right? You seriously think that if tax rates on (for example) all the major auto makers went down, they’d actually pass the savings on to consumers? Competition works great in markets that are full of small companies competeing. It’s not such a great thing in a market dominated by a few big companies. Germany, France, Canada. While I our economy is growing, theirs is stagnant due to over taxation. Well I can’t speak to Europe, you’re dead wrong about Canada. We’ve had a strong economy for many years now, and it keeps growing. The books are balanced, the government is running a surplus, the (Canadian) dollar is gaining ground against the US dollar. And the taxation thing is, at least for middle income earners such as myself, a myth. I pay as much tax here in NY state then I did in Canada. More if you count the fact that here I have to pay for my health care on top of the tax and the cost of utilities is way higher (thanks to the “miracle” of deregulation).Well that is fine. But, then we can’t complain about outsourcing. Because that is a direct result of labor cost and overly (in some cases) burdensome regulation and high taxes. Thousands of jobs are being forced out of this country. Those jobs aren’t providing any wage, living wage or other, because they are in China.We can refuse to import goods from China, which we should be doing anyway because of their abominable human rights record. We can stop giving companies tax breaks to outsource jobs. And outsourcing is *not* a result of labour cost, it’s a result of profitable corperations wanting to make *more* money. For example, Microsoft moved its call centres to India, not because they were losing money, but because they make more money this way. precisely *why* should prosperous people pay more tax than the poor?Umm, because the poor are poor largely because of the actions of the rich?

    • Yes, providing that the “innocent spouse” didn’t benefit from the use of unreported/mistakenly reported $$$

    • If a spouse signs a return, the innocence spouse should not apply because the signature certified a knowledge of the matter.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (, retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at