Married persons.

Except as provided in par. (e), a spouse filing a separate return may be relieved of liability for the tax, interest, penalties, fees, additions to tax and additional assessments under this chapter in the manner specified in section 66 (c) of the Internal Revenue Code. The department may not apply ch. 766 in assessing a taxpayer with respect to marital property income the taxpayer did not report if that taxpayer failed to notify the taxpayer’s spouse about the amount and nature of the income before the due date, including extensions, for filing the return for the taxable year in which the income was derived. The department shall include all of that marital property income in the gross income of the taxpayer and exclude all of that marital property income from the gross income of the taxpayer’s spouse.

The department of revenue shall notify a taxpayer whose separate return is under audit that a marital property agreement or unilateral statement under ch. 766 is effective for tax purposes for any period during which both spouses are domiciled in this state only if it is filed with the department before any assessment resulting from the audit is issued. A marital property agreement or unilateral statement under ch. 766 does not affect the determination of the income that is taxable by this state, or of the person who is required to report taxable income to this state, during the period that one or both spouses are not domiciled in this state or if it was not filed with the department before an assessment was issued.

If a spouse is not domiciled in this state for the entire taxable year, the tax liability and reporting obligation of both spouses during the period a spouse is not domiciled in this state shall be determined without regard to ch. 766 except as provided in this chapter.

A person who seeks relief from liability under par. (a) or (b) shall apply for relief with the department, on a form prescribed by the department, within 2 years after the date on which the department first begins collection activities after July 27, 2005.