Purpose. This IRM provides technical guidance on injured spouse claims affecting taxpayers domiciled in community property states, or cases otherwise raising community property issues.

Audience. This IRM is intended to address the needs of all IRS employees who are working on cases involving married taxpayers domiciled in community property states, or cases otherwise raising community property issues.

Policy Owner. The Director, Examination Field and Campus Policy, who reports to the Director, Headquarters Examination.

Program Owner. Field Examination General Processes (FEGP), who reports to the Director, Examination Field and Campus Policy.

Contact Information. To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.5, Providing Feedback About an IRM Section - Outside of Clearance.

IRC 6402 authorizes the IRS to first apply a taxpayer’s overpayment to any outstanding Federal tax liability on the part of the person who made the overpayment, then requires the IRS to offset any remaining overpayments to satisfy certain unpaid debts. These debts include:

Creation of the Right to Offset for Debts. Past due debts owed to other federal agencies, past due child support, past due legally enforceable state income tax, and past due unemployment compensation obligations become eligible for offset after receipt by the Secretary of the Treasury of a notification from the federal agency or the state. See IRC 6402(c), IRC 6402(d)(1), IRC 6402(e)(1), and IRC 6402(f)(1). Unpaid federal tax liabilities are eligible for IRC 6402 offset upon assessment. No preliminary notices are required before an offset can be made. Fulgoni v. United States, 23 Cl. Ct. 119, 91-1 U.S.T.C. ¶50,256, 67 A.F.T.R.2d ¶91-462 (1991).

How Offset Issues Arise. When spouses file joint income tax returns, each spouse has a separate interest in the jointly reported income and in any overpayment. See Rev. Rul. 74-611, 1974-2 C.B. 399, amplified by, Rev. Rul. 85-70, 1985-1 C.B. 361. If both spouses are liable for a debt described in IRC 6402, the entire overpayment may be offset. Offset issues arise where spouses file joint returns and only one spouse owes an IRC 6402 debt. The general practice of the IRS is to offset the entire debt. See Rev. Rul. 84-171, 1984-2 C.B. 310. However, under well-settled law, where spouses file joint returns and report a refund or overpayment, the spouses have separate interests in the joint overpayment. See Rev. Rul. 80-7, 1980-1 C.B. 296, amplified by Rev. Rul. 87-52, 1987-1 C.B. 347. The spouse who is not liable for the debt (referred to as the “injured spouse”) may file a claim for their portion of the refund (referred to as an “injured spouse claim”). In this circumstance, an allocation must be made to determine the liable spouse's interest in the overpayment, the amount that can be offset for the liable spouse's debt, and the amount to be refunded to the injured spouse. See Rev. Rul. 80-7. Injured spouse issues can arise in all U.S. jurisdictions. However, due to different property rights in income tax and withholding and other credits, there is a difference in the allocation process for community property states as opposed to the other states. See Rev. Rul. 85-70.

Injured Spouse Claims. If spouses file a joint income tax return and an obligation described in IRC 6402 is owed by one of the spouses, the IRS will generally offset the entire overpayment. See Rev. Rul. 84-171. If the injured spouse files a claim for their share of the overpayment, the IRS is required to refund the portion of the overpayment to which the injured spouse is legally entitled. See IRM 21.4.6.5.10.5, Injured Spouse Refund—Tax Offset, 31 CFR 285.2(f), 31 CFR 285.3(f), and 31 CFR 285.8(f). An injured spouse obtains their portion of the overpayment by filing a Form 8379, Injured Spouse Allocation. See IRM 21.4.6.5.8, Form 8379 Injured Spouse Allocation. An injured spouse claim can also be filed with an original return. As will be discussed below, in some circumstances the IRS may have the right under IRC 6402 to offset all or part of the community property portion of the overpayment. The interest a liable spouse has in the community property portion of the overpayment varies from state to state. Exhibit 25.18.5-1, contains examples of the application of injured spouse rules in various states and for various types of liabilities.

Amount Retained and Amount Refunded. As discussed above, if spouses file a joint return and one of them owes an IRC 6402 debt, the IRS will offset the entire overpayment, and only refund the injured spouse’s share of the refund if an injured spouse claim is filed. However, if the injured spouse files a claim with the joint return and the claim is allowed, the IRS will refund the injured spouse’s share of the overpayment. For purposes of IRM 25.18.5, the amount of the overpayment the IRS keeps after an injured spouse claim is filed in either situation is referred to as the "amount retained." The injured spouse’s portion of the overpayment that is refunded after the injured spouse claim is filed is referred to as the "amount refunded."

Injured Spouse v. Innocent Spouse. Injured spouse status and innocent spouse status are frequently confused with each other. Innocent spouse status relieves a spouse of the responsibility for paying taxes that are owed jointly and severally with the other spouse. See IRM 25.15.1, Relief from Joint and Several Liability— Introduction, IRC 66 and IRC 6015. Injured spouse status involves obtaining a refund of a spouse's interest in an overpayment that has been offset under IRC 6402.

Offsets for Debts Other Than Federal Taxes. If an injured spouse claim is filed by a spouse in a community property state, the IRS needs to determine how much will be refunded. If the debt to which the offset was applied is not a federal tax liability, the IRS determines what portion of the overpayment represents the injured spouse's share of the overpayment and refunds it.

Offsets for Federal Tax Debts. If the debt involved is a federal tax liability, the IRS goes through a two-part procedure to determine how much will be refunded to the injured spouse. See Rev. Rul. 85-70.

Injured Spouse’s Share of the Overpayment. The injured spouse’s share of the overpayment is computed by subtracting that spouse's share of the joint liability, determined in accordance with the separate tax formula, from that spouse's contribution of credits toward the joint liability. The amount credited cannot exceed the amount of the joint overpayment.

Separate Tax Formula. Under the separate tax formula, a spouse's share of the joint liability is computed using the separate tax formula, as follows:

Injured Spouse's Separate Tax Liability. To determine the injured spouse's separate tax liability for purposes of the separate tax formula, each spouse's tax liability must be determined as if they filed separate returns. Rev. Rul. 80-7, amplified by Rev. Rul. 87-52; 26 CFR 1.6654-2(e)(5)(ii)(B). This requires an allocation of income and deductions between the spouses.

Allocating Credits. After determining each spouse's share of the tax under the separate tax formula, it is necessary to allocate and apply the credits (for example, withholding, estimated tax, and earned income credits) to each spouse's tax liability to determine their share of the overpayment. Under no circumstances can an injured spouse be refunded more than the joint overpayment. Thus, for example, it is possible under this formula for the liable spouse to not have sufficient credits to cover their share of the tax liability, and for the injured spouse's share of the credits (when applied to their liability) to exceed the joint refund. In this circumstance, the injured spouse is entitled to a refund only to the extent of the overpayment on the joint return. See Rev. Rul. 85-70.

State Community Property Law Presumptions. State community property laws create a presumption that property received by spouses is community property. Therefore, in allocating income the IRS will assume that the items on the return are community property unless the taxpayers prove otherwise or the law provides that particular items of income, deductions or credits are the separate property of one of the spouses. See Rev. Rul. 85-70.

Generally. As previously discussed, to do the calculation based on the separate tax formula, the income, deductions and other tax items must be allocated between the spouses and separate tax liabilities must be determined. With respect to spouses in community property states, there are special rules that apply to income and deductions. These rules are more fully set forth earlier in IRM 25.18.1, Basic Principles of Community Property Law, but some common issues that arise are discussed in this section.

Allocating Income. As previously discussed, state community property laws presume that property acquired by spouses is community property. However, the IRS will not treat an item as community property if it is clear from the face of the return that federal or other law requires that the item be treated as separate property. See discussion below for examples of items treated as separate property income by law. If items are community property income, each spouse is considered to be the recipient of half of the item. In an injured spouse allocation, items of community property income should be allocated 50% to each spouse.

Deductions. Deductions associated with income are generally characterized in the same manner as the income. Therefore, for example, if Schedule C income is treated as community property and allocated to both spouses, any Schedule C deductions are also treated as community property and split. Deductions that are not related to income (such as, medical, charitable contributions, property taxes, state taxes) are split, unless it is established that they were paid with separate property, in which case they would be deductible by the spouse whose separate property was used to pay them. Powell v. Commissioner, T.C. Memo. 1967-32; Hunt v. Commissioner, 47 B.T.A. 829 (1942); Bishop v. Commissioner, 152 F.2d 389 (9th Cir. 1945); Commissioner v. Newcombe, 203 F.2d 128 (9th Cir. 1953); Keeter v. United States, 97-2 U.S.T.C. ¶ 50,940, 80 A.F.T.R.2d ¶ 97-5640 (E.D. Cal. 1997). These rules apply to allocations of deductions for injured spouse calculations.

Effect When All Items Are Community Property. When all items on the return are community property, each spouse will be entitled to half of the overpayment. This happens frequently where all of the income on the return is from wages.

Same-sex marriage. On June 26, 2015, in Obergefell v. Hodges, 576 U.S. 644 (2015), the Supreme Court held that:

Registered Domestic Partners. Under the laws of California, Nevada, and Washington, registered domestic partners are subject to state community property laws in the same manner as married couples. Cal. Fam. Code 297.5(a); Nev. Rev. Stat. 122A.200; Wash. Rev. Code 26.16.030. However, since registered domestic partners are not married, they cannot file "married filing joint" or "married filing separate" federal income tax returns. If a registered domestic partner in California, Nevada or Washington files their individual federal income tax return reporting an overpayment, the overpayment is available to satisfy the separate tax debt of the other registered domestic partner in the same manner it would be available to satisfy a separate debt of a married individual in those states. See IRM 25.18.5.15, Offsets Without a Joint Return. Thus, all or part of the overpayment may be offset and applied to the other registered partner’s debt.

Wisconsin law allows couples to file a declaration of domestic partnership with the state and be recognized under state law as domestic partners (see Wis. Stat. 770.01 et. seq.). However, this does not subject them to Wisconsin marital property statutes. Accordingly domestic partners in Wisconsin do not report income under community property principles and are not subject to tax collection under community property principles.

In spite of the state community property law presumption, some items of income, deduction or tax may be separate property. This usually occurs because the spouses have provided proof that the items are separate property or because federal law dictates that the items are separate property. When this happens, the affected items should be allocated to the spouse who owns them. Common circumstances where items are separate property include the following:

Wage Withholding. Withholding credits from community property income are community property and are allocated 50% to each spouse. See 26 CFR 1.31-1(a); Gilmore v. United States, 290 F.2d 942 (Ct. Cl. 1961), rev'd on other grounds, 372 U.S. 39 (1963). If it is established that the underlying wages are not community property, the withholding should be characterized consistently with the wages.

Estimated Tax Payments. Where spouses make estimated tax payments and subsequently file a joint return with an overpayment subject to an IRC 6402 offset, the estimated tax payments should be allocated in proportion to the spouses' separate tax liabilities. The formula for this is as follows:

Taxes and Credits. Some taxes and credits are allocated to spouses without regard to community property. These items are exceptions to the community property presumption and are not split. These include the earned income credit and self-employment tax.

Earned Income Credit. Under IRC 32(c)(2)(B)(i), the amount of earned income for purposes of the earned income credit is calculated without regard to community property laws. If only one spouse has earned income, the credit is allocated to that spouse. If, however, both spouses have earned income and are eligible for the credit, each spouse’s share must be determined. See Rev. Rul. 80-7, amplified by Rev. Rul. 87-52. Under IRC 32(b), the credit is phased out as certain income levels are reached. Therefore, for purposes of determining each spouse's contribution toward an overpayment, the credit cannot be allocated on a dollar-for-dollar basis. The allocated amount is arrived at by using the earned income tax credit tables to determine the hypothetical separate earned income tax credit that would have been available to each spouse if that spouse had filed a separate return (and if the earned income credit were available on a separate return) and then using the following formula:

Self-Employment Tax. The self-employment tax with respect to self-employment income (net income from a trade or business, other than a partnership) is allocated to the spouse who has management and control over the trade or business. See 26 CFR 1.1402(a)-8(a); Heidig v. Commissioner, T.C. Memo. 1986-411; Tolotti v. Commissioner, T.C. Memo. 1987-13. Management and control means actual management and control, not management and control imputed from husband to wife under community property laws. See 26 CFR 1.1402(a)-8. Therefore, the self-employment tax is allocated to the spouse actually carrying on the trade or business. For purposes of the injured spouse calculation, self-employment tax should be allocated in accordance with this rule. Similarly, the self-employment tax attributable to a partnership that is a trade or business is allocated to the spouse who is the partner, even if part of the income is otherwise attributable to the other spouse for income tax purposes. See 26 CFR 1.1402(a)-8(b).

Generally. To determine how much to refund after an injured spouse claim is filed in a community property state, the IRS must first determine each spouse's community property share of the overpayment and any separate property. See Rev. Rul. 85-70. Since the payments are frequently all community property, this will usually be 50% of the overpayment.

Offsets for Debts Other Than Federal Taxes. If the IRC 6402 debt is for a liability other than federal taxes, then other federal law applies and the amount of the community property portion of the overpayment that may be retained, if a claim is filed, is limited to the liable spouse's share of the community property, without regard for the state-law rule giving the liable spouse an interest in the community property above 50%, and any portion of the refund that is the liable spouse's separate property. Oatman v. Secretary of the Treasury, 34 F.3d 787 (9th Cir. 1994). The liable spouse’s property interest in the community property portion of the overpayment is not altered by any right that a creditor may have under state law to reach the non-liable spouse's share of the joint refund. In the context of IRC 6402(c), (d), (e), and (f), the IRS is not a creditor of the liable spouse because the debt being collected is not a tax debt. Instead, the IRS is acting as a conduit. The IRS follows this position in all community property states. Therefore, in offsets not involving federal tax debts, the IRS will refund the injured spouse's community property share of the overpayment and any part of the refund that is the injured spouse's separate property. See Example 2, Debts Not Involving Federal Taxes.

Offsets for Federal Tax Debts. If the liability is for federal taxes, however, the amount allocable to the liable spouse's share of the overpayment is the minimum amount that will be retained to apply to the debt. If the applicable state law allows a creditor to reach an additional portion of community property to satisfy the separate liability of one of the spouses, the IRS can exercise this right and retain a larger portion of the overpayment. See Rev. Rul. 85-70.

State law defines property. IRC 6321 provides the IRS with a statutory lien or claim attaching all a taxpayer’s property or rights to property for the amount of the federal tax debt. As discussed previously, some state community property laws define the property reachable by creditors to include more than half of community property for satisfaction of the separate liability of one of the spouses. In the case of an offset, relating to the separate statutory lien for the federal tax debt of one of the spouses, these state laws give the liable spouse a property interest in more than one half of the community property. The IRS can rely on these state property laws for attachment of the IRS’s statutory lien to and retention of more than half of the community property interest in an overpayment. These rules are complex and care must be taken in applying them. It is often necessary to know when the spouses were married. IRS personnel working these claims often do not have this information, therefore they should assume that the liabilities were incurred during marriage unless the taxpayer establishes otherwise. See IRM 25.18.5.12.1, Summary of Right to Property Rules in Community Property States, below for a brief summary of the rules in each community property states. These rules are also summarized in Exhibit 25.18.5-1.

Because of complexities in Texas community property law, it is important to discuss with Counsel how to handle injured spouse claims involving federal tax offsets in Texas.

Management Control of Community Property in Texas. Under Texas law, there are two types of community property: Joint Management Community Property (JMCP) and Sole Management Community Property (SMCP). SMCP is property that a spouse is given the sole right to manage, control, or dispose of. SMCP is the property the spouse would have owned if single. Tex. Fam. Code Ann. 3.102(a). The property includes, but is not limited to:

Separate Property in Texas. As in other community property states, Texas also recognizes the existence of separate property. This includes all property owned prior to marriage, property acquired during marriage by gift or inheritance, and the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage. Neither spouse has an interest in the other spouse’s separate property. See Tex. Fam. Code Ann. 3.001.

Collection From Separate and Community Property in Texas. Texas state law defines a spouse’s interest in separate and community property subject to collection of federal taxes. Broday v. United States, 455 F.2d 1097, 1099-1100 (5th Cir. 1972). Where one spouse owes a liability, all of the separate property of the liable spouse, all of the SMCP of the liable spouse, and all of the JMCP are subject to the payment of that separate liability. See Tex. Fam. Code Ann. 3.202. The IRS may also reach half of the SMCP of the non-liable spouse to collect a spouse’s separate tax liability. Under Texas law, the SMCP of a spouse is not subject to any liabilities that the other spouse incurred before marriage, or for any nontortious liabilities the other spouse incurs during marriage. See Tex. Fam. Code Ann. 3.202. Nevertheless, the IRS can reach half of the SMCP, because it is community property and state law has given the liable spouse a half interest in it. State law restrictions and exemptions placed on normal creditors do not apply to the IRS. Medaris v. United States, 884 F.2d 832 (5th Cir. 1989); Broday v. United States, 455 F.2d 1097 (5th Cir. 1972). The IRS cannot reach the separate property of the non-liable spouse. Unlike some other community property states, the IRS’s collection remedy for unpaid taxes in Texas is not affected by whether the liability was incurred before or during marriage.

Processing Injured Spouse Claims in Texas. The tax collection principles cited in paragraph 4, above, also apply in offsetting overpayments for tax debts under IRC 6402 in Texas. If there is a federal tax debt, the IRS may retain 100% of any JMCP, 100% of any portion of an overpayment that is the liable spouse's SMCP (for example, any withholding attributable to the liable spouse's wages) and 50% of the injured spouse's SMCP (such as, any withholding attributable to the injured spouse), and 100% of any part of the overpayment that is the liable spouse's separate property. See Rev. Rul. 2004-74. The remainder would be refunded. However, before an offset can be made, it is necessary to determine what portion of the overpayment can be characterized as separate property, JMCP, and SMCP.

Calculating the Liability of Each Spouse. The first step in determining how much of an overpayment can be offset is to determine the injured spouse’s share of the overpayment. To do this, each spouse’s separate tax liability must be calculated. If all of the items on the return are community property, then the tax on the return will simply be allocated 50% to each spouse. Otherwise, it may be necessary to allocate income and deductions between the spouses, determine each spouse’s separate tax, and go through the separate tax formula. See IRM 25.18.5.4 through IRM 25.18.5.9.

Applying the Credits. Once each spouse’s portion of the tax liability has been calculated, then a determination must be made as to each spouse’s share of the tax and payment credits. If all of the credits on the return are community property, then the credits on the return will simply be allocated 50% to each spouse. Otherwise, it may be necessary to allocate the credits between the spouses. See IRM 25.18.5.9.

Offsetting the Overpayments. Once the amount of each spouse’s overpayment has been determined, the IRS will establish the amount retained. Note in every case, the IRS can retain the entire amount of the liable spouse’s overpayment. As discussed in IRM 25.18.5.11 (2),

Characterizing the Injured Spouse’s Overpayment Under Texas Law. To characterize the injured spouse’s overpayment, it is necessary to first characterize the various payment credits that have been applied to the injured spouse’s side of the overpayment ledger. As discussed above, generally, a spouse’s wages are considered to be their SMCP and therefore, any withholding attributable to a particular spouse’s wages should be considered their SMCP. Wynne v. United States, 306 F. Supp. 2d 660, 2004 U.S. Dist. LEXIS 3574, 93 A.F.T.R.2d 692, 2004-1 U.S.T.C. ¶ 50,184 (N.D. Tex. 2004). Any earned income credit or estimated tax paid on a separate declaration is separate property. The presumption under Texas law is that items are JMCP, unless they are classified otherwise. Accordingly, the presumption with respect to other credits is that they are JMCP. Each spouse’s share of the overpayments is the same proportion each spouse’s payment credit bears to the total payments made. Gens v. United States, 673 F.2d 366 (Ct. Cl. 1981), cert. denied, 459 U.S. 906 (1982); Glaubke v. United States, 78-1 U.S.T.C. ¶ 9206, 41 A.F.T.R.2d 759 (E.D. Va. 1978). Thus, characterize the total payments, the overpayment should have the same proportionate character as the payments. For example:

Where there are liabilities for unpaid federal taxes and other liabilities described in IRC 6402, the offset should first be applied to the federal tax liabilities. See IRC 6402(f)(2) and 26 CFR 301.6402-5(d)(1). If there is any amount left over after this application, it would then be applied to the other liabilities. If an injured spouse claim is filed, the IRS cannot offset more than 50% of a community property overpayment to satisfy a child support obligation, a debt to another federal agency, a state income tax liability, or unemployment compensation liability pursuant to IRC 6402.

If unpaid federal tax liabilities exceed 50% of the portion of the overpayment that is community property and there are other liabilities not involving federal taxes, the IRS can only apply the overpayment to the extent of the federal tax debt. Any excess cannot be applied to the other obligations, but should be refunded. This is because offset under IRC 6402 for the payment of non-tax obligations may not exceed 50% of the community property. The IRS will have already taken the maximum amount (50%) of the refund and applied it to the tax obligation.

If the tax debt is less than 50% of the community property portion of the joint overpayment, then the IRS can retain the full amount of the tax debt. The IRS can retain the difference between the tax offset and 50% of the overpayment and apply this amount to the liable spouse’s other IRC 6402 debt. In this case, the remaining 50% of the joint overpayment must be refunded to the injured spouse.

The priority of offset between IRC 6402 obligations after federal taxes is as follows:

The IRS may legally offset under IRC 6402 a spouse's overpayment to satisfy an unpaid tax liability of the other spouse, even though the overpayment was reported on a separate return. Eaves v. United States, 433 F.2d 1296 (10th Cir. 1970). Assuming that the non-liable spouse who filed the return reported their portion of the community income correctly, an offset is only permissible to the extent that state law gives the liable spouse a property interest in the overpayment reported on the non-liable spouse’s separate return. The portion of the overpayment that is separate property is not subject to offset because the liable spouse has no property interest. The portion of the overpayment that is community property may be retained to the extent state law permits collection against the non-liable spouse’s half of community property for an obligation of the liable spouse. Presumably, in filing a separate return, the non-liable spouse has already made the allocation, and the reported overpayment would represent their share of the overpayment but for state law giving the liable spouse a property interest in it. However, the examiner should verify that the income was reported properly under community property principles.

Earned Income Credit Allocation. See Example 1, Earned Income Credit Allocation.

Debts Not Involving Federal Taxes. See Example 2, Debts Not Involving Federal Taxes.

Federal Tax Debt and IRC 6321 Statutory Lien or Claim. See Example 3, Federal Tax Debt and IRC 6321 Statutory Lien or Claim.

Federal Tax Offsets in Texas See Example 4, Federal Tax Offsets in Texas.

Order of Application. See Example 5, Order of Application.