Understanding the 'Innocent Spouse' defense against fraud penalties

By Megan L. Brackney
The Trusted Professional
March 2015 Edition

Practitioners should be aware that the Internal Revenue Code (IRC) Section 6663 fraud penalty is a personal penalty that applies individually to taxpayers. If the IRS finds fraud on a jointly filed federal income tax return, it does not mean the penalty should be automatically imposed on both spouses. Thus, if the IRS proposes to impose the penalty on both spouses, it should prove by clear and convincing evidence that each spouse, individually, engaged in fraud. An “innocent spouse” should not be subject to the penalty. Here, we’ll address the innocent spouse defense to the fraud penalty, how to raise the defense, as well as the ethical considerations of a practitioner, with respect to the potential conflicts of interest of representing both spouses.

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