Clinic Helps Innocent Spouse Obtain Relief from Ex’s $335K Tax Debt

A woman was absolved of liability from a more than $335,000 federal tax liability accrued by her ex-husband thanks to students in Minnesota Law’s Ronald M. Mankoff Tax Clinic.

Different students have worked on the case since the beginning of the 2019 academic year, according to Associate Clinical Professor Caleb Smith, who oversees the Tax Clinic. In addition to the federal tax savings, a clinic student’s persistent efforts saved the woman nearly $24,000 in state taxes.

“It's one of the bigger amounts that we've saved somebody,” Smith said. “What I was mostly happy with was just how great of advocacy the students did on a very long, drawn-out case.”

The Tax Clinic’s client is woman who is not a native English speaker and does not have a college degree, Smith said. A stay-at-home mom, she was unaware that her husband, who controlled their finances, had not filed correct tax returns for nearly a decade. When married couples file joint tax returns, however, each party is fully liable for all taxes due.

Erin Petersen ’20 began working on the case at the start of her 3L year. Petersen looked into what kind of evidence would help the client get a positive result, interviewed the client and filed a claim for innocent spouse relief with the Internal Revenue Service.

Under such a claim, the IRS can absolve a spouse of responsibility for paying tax, interest and penalties if the other spouse or former spouse improperly reported or omitted items from a tax return.

The IRS granted the request without further question.

“I was really happy for her to get that news and be able to start this next chapter of her life without that burden over her,” said Petersen, now at senior associate in international tax with KPMG in the Twin Cities.

Tax Clinic students submitted nearly 100 pages of documents to substantiate the woman’s claim, including a narrative of her experience and numerous exhibits, Smith said. The effort can last for a semester or longer.

“All you have to do is send in an IRS form that’s six pages long,” Smith said. “But we want to do a better job of advocacy with that. … The IRS just straight up agreed with it.”
 
Separation of Liability
When Xiaoyuan (Sharon) Zhou ’23 took over the case, she primarily focused on solving the client’s state tax issue. Zhou tried to apply for separation of liability on behalf of the client, a program under which the Minnesota Department of Revenue (MNDOR) can adjust a person’s tax debt after a divorce.
 
MNDOR, however, found the client ineligible for the Separation of Liability Program because a six-year statute-of-limitation had expired. Zhou pushed back, asking for the governing authority on the statute-of-limitation because it is not included in the governing Minnesota Statute and related Administrative Rules (MN Administrative Rules part 8160.0500 and MN § 289A.31). After waiting for a reply, she reached a different official who told her the statute regarding the statute-of-limitation had been repealed in 2019 but was nonetheless still applicable to the client’s case.
 
As an alternative, Zhou prepared and applied for an offer in compromise, which could allow the client to settle her state tax debt for less than the full amount owed. After further discussion, Zhou reached a settlement that reduced the client’s liability from more than $23,000 to just one dollar.
 
Zhou said she learned several valuable lessons in the Tax Clinic, including keeping good records and to “stand up for your client and take the initiative.” Zhou also learned what Professor Smith had always said, “trust but verify.” 
 
Amber Peterson ’19, a former Tax Clinic student, knew the client as a family friend and referred her to the clinic for help.

“She’s extremely grateful for the Tax Clinic and the students she worked with,” said Peterson, an associate in Winthrop & Weinstine’s tax credit finance group. “They were on top of all of her issues. After the resolution, she feels like she’s so much more independent. It was just a weight on her shoulders so it was a relief to finally get this wrapped up.” 

—By Todd Nelson, a freelance writer based in Lake Elmo, Minnesota