IRS Equitable Relief: The Innocent Spouse Alternative When You Don't Qualify

Equitable relief is the third type of innocent spouse relief, and it is often the only option available. Traditional innocent spouse relief under IRC 6015(b) requires that you did not know (and had no reason to know) about the understatement on the joint return. Separation of liability under IRC 6015(c) requires that you are divorced, legally separated, or have lived apart for 12 months. If neither applies to your situation, equitable relief under IRC 6015(f) is the catch-all. It has no fixed eligibility formula. Instead, the IRS evaluates seven factors to determine whether it would be “inequitable” to hold you liable for the tax. The flexibility is both the advantage and the challenge: there is no bright-line test, and the outcome depends on the weight the IRS gives each factor in your case.

What is the difference between the three types of innocent spouse relief?

Traditional relief (IRC 6015(b)). Applies to understatements (items were wrong on the return). Requires that you did not know, and had no reason to know, about the understatement. Available regardless of marital status. See building a case with Form 8857 for the full walkthrough.

Separation of liability (IRC 6015(c)). Applies to understatements only. Allocates the liability between the spouses based on who is responsible for the erroneous items. Requires that you are divorced, legally separated, or have lived apart for at least 12 months. Actual knowledge of the erroneous item disqualifies you.

Equitable relief (IRC 6015(f)). Applies to both understatements and underpayments. This is the only type that covers underpayments (the return was correctly filed, but one spouse did not pay the tax). No specific knowledge or marital status requirement, but the IRS evaluates the totality of circumstances using the seven-factor test. This is the broadest and most flexible form of relief.

The critical distinction: if your spouse correctly reported all income but failed to pay the tax (perhaps because they spent the money or diverted it), traditional relief and separation of liability do not apply at all. Only equitable relief covers this situation.

What are the seven factors?

Revenue Procedure 2013-34 lists seven factors the IRS considers when evaluating equitable relief. No single factor is determinative; the IRS weighs them collectively.

1. Marital status. Are you divorced, separated, widowed, or still married? Divorce or separation weighs in your favor because it demonstrates that you no longer benefit from the financial relationship with the other spouse. If you are still married and filing jointly, the IRS is less inclined to grant relief because both spouses continue to share economic benefits.

2. Economic hardship. Would you suffer economic hardship if relief is denied? The IRS looks at whether paying the tax would prevent you from meeting basic living expenses (housing, food, medical care, transportation). This is similar to the hardship standard used for Currently Not Collectible status. If you can demonstrate that paying the tax liability would leave you unable to cover essential expenses, this factor weighs strongly in your favor.

3. Knowledge or reason to know. Did you know, or have reason to know, about the understatement or underpayment? This is the same inquiry as traditional relief but is evaluated more holistically under equitable relief. Partial knowledge does not automatically disqualify you. If you knew the income was understated but believed your spouse was handling the tax payments, that may still support equitable relief for the underpayment portion.

4. Legal obligation. Is there a divorce decree, separation agreement, or other legal document that assigns the tax liability to the other spouse? If a court ordered your ex-spouse to pay the tax and they did not, this weighs heavily in your favor. Note that a divorce decree does not change your liability to the IRS (joint and several liability survives divorce), but it is strong evidence that you should not bear the burden.

5. Significant benefit. Did you receive a significant benefit (beyond normal support) from the understated or unpaid tax? If the unreported income funded a lavish lifestyle, expensive purchases, or investments that you benefited from, this weighs against you. If the other spouse hid the money or spent it on themselves (gambling, another relationship, personal debts), this weighs in your favor.

6. Compliance. Have you been compliant with the tax laws since the year at issue? If you have filed all required returns and paid all taxes for subsequent years, this supports your claim. If you continue to underreport or underpay, the IRS is less sympathetic.

7. Mental or physical health. Were you suffering from mental or physical health issues that affected your ability to question or challenge the other spouse’s tax decisions? Abuse (physical, emotional, financial), serious illness, or disability can support equitable relief even when some knowledge existed.

When does equitable relief apply to underpayments?

The most common scenario: a couple files a joint return showing $15,000 in tax owed, and one spouse was supposed to make the payment but did not. Perhaps the money was spent, or the check bounced, or the spouse simply did not pay. The return itself was correct. Neither traditional relief nor separation of liability covers this because neither applies to underpayments.

Equitable relief under IRC 6015(f) is the only remedy. The IRS evaluates whether it is fair to hold you liable for the underpayment that your spouse was responsible for. If the divorce decree assigns the tax debt to the other spouse and you had no control over the payments, equitable relief is typically granted.

This also arises when one spouse makes estimated tax payments during the year, those payments are credited to the joint account, and the other spouse’s income generates additional tax that is not covered. The paying spouse may seek equitable relief for the portion attributable to the non-paying spouse’s income.

How does this work for cross-border filers?

Cross-border situations add layers:

Canadian-resident requesting spouse. If you moved to Canada after the marriage ended and the joint return liability remains, the IRS can still pursue you for joint and several liability. Filing Form 8857 from Canada follows the same process. The economic hardship analysis considers your Canadian income and expenses.

Foreign income. If the understatement involves foreign income that the other spouse earned (Canadian employment income, foreign investment income, unreported offshore accounts), the requesting spouse’s knowledge of the foreign income is evaluated. A spouse who had no connection to the foreign activity and no access to foreign financial records has a strong case for lack of knowledge.

Treaty considerations. The Canada-US treaty does not directly address innocent spouse or equitable relief. However, if the IRS grants equitable relief and the requesting spouse is relieved of liability, the CRA does not independently pursue the US tax debt (the treaty collection provisions apply to the debtor’s own liability, not the joint liability allocated away by equitable relief).

Dual-country divorce decrees. If the divorce was granted in Canada, the IRS still recognizes it for the marital status factor. The legal obligation factor (whether the divorce decree assigns tax liability) is evaluated the same way regardless of which country issued the decree, as long as the decree is final and enforceable.

What should I do next?

If you filed a joint return and the other spouse caused an understatement or underpayment: determine which type of relief applies. If you did not know about the understatement, start with traditional relief. If you are divorced and the understatement can be allocated, consider separation of liability. If neither applies (especially for underpayments where the return was correct but the tax was not paid), equitable relief under IRC 6015(f) is the path. File Form 8857, address all seven factors with specific facts, and attach supporting documentation. If you are also facing IRS collection action (levy, garnishment), you can raise equitable relief during a CDP hearing.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.