On March 13, Gov. Butch Otter signed Senate Bill 1301, which grants innocent-spouse relief to Idahoans for state tax liabilities they had no hand in creating.
Innocent-spouse relief is an IRS procedure under Internal Revenue Code Section 6015 that allows a spouse or ex-spouse to be relieved of federal joint and several tax liability if the spouse applying did not know of the underlying circumstances leading to the deficiency.
Before this law, the Idaho Tax Commission did not recognize innocent-spouse relief. That meant a spouse would still be liable for any state tax liability owed. This prohibition was troublesome for taxpayers, because quite often a taxpayer who had a federal tax liability would also have a state tax liability stemming from the same issue, since state taxes significantly follow federal tax determinations.
The underlying premise of innocent-spouse relief is fairly straightforward: An innocent spouse should not have to pay a tax debt the spouse had no hand in creating. After the IRS reviews all relevant factors, it releases a determination to the taxpayer either granting relief or denying it. The factors can vary depending on the type of relief applied for, but they're generally fairness factors, such as abuse, deceit or fraud hidden from the innocent spouse.
The new law is retroactive, so a taxpayer who has already received innocent-spouse relief for federal taxes may now submit their determination to the Idaho Tax Commission to be relieved of their state taxes.
But there are some substantial complications that could be difficult for the Tax Commission to resolve.
The prevalent issue looming is when a taxpayer has no federal tax liability but has a state liability. This exact scenario has already arisen in the University of Idaho's Low Income Taxpayer Clinic, which is staffed by law students. The new law offers no guidance on how to make a determination in such a circumstance. However, it grants authority to the commission to promulgate rules necessary to implement state innocent-spouse relief.
Even though the commission likely has the authority to create a determination system akin to the IRS procedure, it has no experience in making such determinations.
The system would also require substantial resources to either be shifted to this area, or require funding to create the additional resources. Furthermore, the IRS is already backlogged and short-staffed, so it is unlikely to issue a determination to a taxpayer on innocent-spouse relief when there is no federal tax liability.
To resolve this issue, the Legislature could issue guidance on how the state will assess innocent-spouse applications in such circumstances. A more likely resolution will be rules issued internally by the commission. The system used by the IRS has worked well and granted relief to many in need, so it may be wise for the commission to avoid reinventing the wheel.
If you have questions relating innocent-spouse relief, you should contact a tax attorney or individual otherwise qualified to assist you.