Albert and Judith are married. During 2019 and 2020, Judith was an attorney who worked out of their home. She made $100,000 during 2019 and $125,000 during 2020. Albert was the director of finance for West Side Christian Church and earned wages of $80,000 for each year. While Albert worked for the church those two years, he embezzled $100,000 from the church by writing checks to himself and misusing the church's credit card. All income and embezzled funds were deposited into a joint checking account owned by Albert and Judith. Albert was in charge of the couple's finances and prepared their tax returns. When preparing their tax returns, Albert did not include Judith's income and self-employment taxes. Both Albert and Judith signed the tax returns that were filed. Albert was incarcerated for the embezzlement. The IRS determined that Albert and Judith owed additional taxes for Judith's income and self-employment taxes. Albert and Judith would like to know if Judith is eligible for innocent spouse relief, and thus would not be liable for the additional taxes. Albert and Judith's address is 446 West Street, Moline, IL 61265.

Please include the source of IRC section, 1 Treasury Regulation, and 1 U.S. Tax Court case  below that answers the question into research memorandum:

1. IRC: 26 USCS § 6015
 Judith may qualify for innocent spouse relief under section 6015 of the Internal Revenue Code due to her husband Albert's embezzlement, which she may not have known when they filed their joint tax return for 2019 and 2020. Under IRC Section 6015, Judith may be qualified to claim innocent spouse relief, but that is subject to 
certain conditions outlined in subsections (b) including:
- "(B) on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return;" (in this case, Albert)
- Judith, the other spouse on the joint tax return, must prove that she did not know 
and had no reason to know about the omission when she signed the tax return.
- It is unfair to hold Judith responsible for the tax deficiency due to understatement.
- Judith must elect the benefits of this subsection within two years after the IRS begins collection actions for the joint return.
 If Judith meets these conditions, she can be relieved of liability for the shortfall caused by Albert's incorrect entries on the joint tax return

2. Treasury Regulation: 26 CFR 1.6015-2 

The source, § 1.6015-2 of the tax code, delivers the criteria and related procedures for determining eligibility for innocent spouse relief, which is necessary for assessing Judith's potential liability for additional taxes due to her failure to report—income and self-employment taxes on joint tax returns filed with her spouse, Albert. In this case, Albert embezzled money and failed to include Judith's income and self-employment taxes on their returns. If Judith did not know about these deficiencies and it would be unfair to hold her liable, she may be eligible for innocent spouse relief

3. Di Giorgio v. Comm'r, T.C. Memo 2023-44

The case of Albert and Judith Smith shares similarities with the case of Ms. Di Giorgio in their pursuit of innocent spouse relief under section 6015. In both situations, the spouses were unaware of financial misconduct committed by their partners. In Ms. Di Giorgio's case, her husband engaged in fraudulent reporting and failed to report substantial income, leading to tax deficiencies. Similarly, Albert, in the scenario of Albert and Judith Smith, embezzled funds and omitted Judith's income and self-employment taxes from their tax returns.

Both cases involve spouses who were not involved in the financial wrongdoing, were not aware of the discrepancies in the tax returns filed jointly, and did not benefit significantly from the misreported funds. Both Ms. Di Giorgio and Judith were kept in the dark about the financial irregularities by their respective partners, who were solely responsible for managing their joint finances and preparing their tax returns.

In seeking innocent spouse relief, both Ms. Di Giorgio and Judith are facing situations where they are unfairly held liable for tax deficiencies caused by their spouses' actions. Their eligibility for relief hinges on proving their lack of knowledge about the financial misconduct and demonstrating that it would be inequitable to hold them responsible for the resulting tax liabilities. Both cases underscore the importance of innocent spouse relief provisions in protecting individuals who are unknowingly subjected to tax liabilities due to their spouses' fraudulent or negligent actions.

 

Certainly, the case of Ms. Di Giorgio serves as relevant evidence to support Albert and Judith Smith's pursuit of innocent spouse relief. In the case of Ms. Di Giorgio, the court recognized her lack of knowledge about her husband's financial misconduct, her limited involvement in financial matters, and her inability to recognize the fraudulent activities due to her lack of expertise. Similarly, in the case of Albert and Judith Smith, Judith's situation mirrors Ms. Di Giorgio's in that she was not aware of her spouse's embezzlement and mismanagement of their finances.

Just as Ms. Di Giorgio was deemed eligible for innocent spouse relief because she lacked knowledge and involvement in her husband's fraudulent reporting, Judith's case can be argued based on her ignorance of Albert's embezzlement and financial misdeeds. The court's decision in Ms. Di Giorgio's case can be cited as a precedent, emphasizing the importance of innocent spouse relief for individuals who are unknowingly caught up in their spouses' financial misconduct. Albert and Judith Smith can use this case as evidence to support Judith's claim for innocent spouse relief, demonstrating that she meets the criteria for relief based on her lack of knowledge and involvement in the financial wrongdoing.

 

 

Certainly, the case of Ms. Di Giorgio provides a compelling precedent in considering innocent spouse relief for Albert and Judith Smith. Much like Ms. Di Giorgio, Judith finds herself in a situation where her spouse, Albert, engaged in financial misconduct without her knowledge. In Ms. Di Giorgio's case, the court recognized her limited understanding of financial matters, her lack of access to relevant financial records, and her complete trust in her spouse, which contributed to her unawareness of his fraudulent activities. Similarly, Judith, an attorney, was not aware of Albert's embezzlement and mismanagement of their joint finances. Drawing parallels between these cases, Judith's lack of involvement, limited access to financial information, and the fact that she signed tax returns prepared by Albert without knowing the discrepancies, align with the circumstances that led to Ms. Di Giorgio's successful claim for innocent spouse relief. Therefore, the court's decision in Ms. Di Giorgio's case can serve as pertinent evidence, bolstering Judith's plea for innocent spouse relief, highlighting the importance of considering her lack of awareness and involvement in the financial misconduct perpetrated by her spouse, Albert.