Innocent Spouse

Innocent Spouse

On August 13, 2013, the IRS released new proposed regulations under the innocent spouse rules. In general, a husband and wife are allowed to file a joint federal income tax return, or choose to file married filing separate. If they choose to file a joint return, each spouse is jointly and severally liable for the tax on the return, including any additions to tax, penalties, and interest. Therefore, the IRS is authorized to collect the entire amount of tax plus any additions, penalties, and interest from either spouse, regardless of which spouse is responsible for the income, deductions, credits, or basis that resulted in the liability.

There are several exceptions to the general rule:

• §6015(b) allows an innocent spouse to elect relief from joint liability if understatements of tax are attributable to erroneous items of the other spouse and the innocent spouse had no reason to know of the understatement and, taking into account all the facts and circumstances, it is inequitable to hold the innocent spouse liable.
• §6015(c) allows an innocent spouse who is divorced, legally separated, or no longer living with the other spouse to elect liability for his/her share of the tax as if the spouses had originally filed separate tax returns. (separation of liability)
• §6015(f) provides that an innocent spouse may request equitable relief from a tax understatement or underpayment when the innocent spouse does not qualify for relief under the other two provisions and it would be inequitable to hold the innocent spouse liable considering all the facts and circumstances. An example of equitable relief under §6015(f) is when there is domestic abuse in the marriage.
• §6015(b) and §6015(c) both impose a 2-year deadline for a taxpayer to elect innocent spouse relief. Under the 2-year deadline, an innocent spouse has two years from the date of the IRS first collection activity to make the election. 
• §6015(f) does not contain an explicit deadline to request equitable relief.

In 1998, IRS regulations imposed a 2-year deadline for §6015(f) equitable relief under the premise that each statutory provision should be consistent (Notice 98-61). In Lantz, 132 T.C. 131 (2009), the Tax Court considered the 2-year deadline regulations for §6015(f) and ruled that the regulations were invalid. On appeal to the 7th Circuit, the Tax Court decision was reversed upholding the validity of the 2-year deadline. In subsequent cases not under the 7th Circuit Court jurisdiction, the Tax Court has continued to find the regulations with a 2-year deadline invalid.

The IRS has reconsidered the 2-year deadline and issued new guidance. The new guidance says the 2-year deadline no longer applies to requests for equitable relief under IRC §6015(f). Instead, to be considered for equitable relief, a request must be filed with the IRS within the 10-year statute of limitations under §6502 for collection of tax, or the 2-year or 3-year statute of limitations under §6511 for credit or refund of tax, as applicable to the specific request (Notice 2011-70). 

Under transitional rules, the 2-year deadline under prior regulations does not apply to any request for equitable relief filed on or after July 25, 2011 or any request filed prior to July 25, 2011 that is still pending with the IRS as of that date.

Illustration:

• For 2012, Wilma and Fred filed a joint federal income tax return on April 15, 2013. For 2013, Wilma and Fred filed separate federal income tax returns and Wilma’s return showed a $4,000 overpayment. 
• On March 15, 2014, the IRS determined Fred and Wilma's 2012 joint tax liability was underpaid by $10,000 and subsequently offset Wilma’s $4,000 overpayment from her 2013 separate federal income tax return and applied it towards Fred and Wilma's 2012 joint tax liability. The IRS offset was the first collection activity the IRS initiated against Wilma to collect the underpaid 2012 joint tax liability. 
• On October 13, 2016, Wilma requests innocent spouse relief under §6015. Wilma’s request is beyond the 2-year limit for requesting innocent spouse relief under §6015(b) and §6015(c). 
• The statute of limitations for requesting credit or refund of the $4,000 withheld from Wilma’s 2013 overpayment for equitable relief under §6015(f) has also expired. 
• However, the 10-year statute for collecting the additional $6,000 due has not yet expired. 
• Wilma is allowed to request equitable relief for the $6,000 of unpaid tax from their 2012 joint tax return.

Source:  Tax Materials, Inc. The TaxBook Update Service 08/26/2013
IRC §6015
REG-132251-11
Innocent Spouse Relief- IRS Modifies Section 6015(f), Equitable Relief Rules

Three Ways to Pay Your Federal Income Tax

Taxpayer Representation - resolving tax liabilities :: Call our Tax Office! 

• Options
1. Full Pay
2. Payment plan
3. OIC - Equity
4. CNC - Debt doesn't go away (Currently Not Collectible - "Code 53") 
• Attorney referrals to discharge taxes in bankruptcy for certain exceptions.
• Tax lien & levy assistance - bank account levies/garnished wages 
• Partial Payment Installment Agreement (PPIA) IRC§6159 (affordable monthly payment plan) Form-9465 - Installment Agreement Request
• Expanded administrative appeals in many dispute areas. 
• Innocent spouse relief IRC§6015(b): Form 8857 (Request for Innocent Spouse Relief)
• "Innocent Spouse"-one who signs a return without knowledge or benefit of the income omitted from the joint return.
• Separation of liability relief - innocent spouse IRC§6015(c): Form 8379 (Injured Spouse Allocation)
  • "Injured Spouse"-involves an event before the marriage such as delinquent child support, back taxes or student loans.
• Equitable relief - innocent spouse IRC§6015(f)
• Offer-in-Compromise (OIC) IRC§7122 (settle debt for Reasonable Collection Potential)