Changes to Innocent Spouse Program may Become Permanent

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Married couples who file jointly have “joint and severable” liability for any resulting tax debts (i.e., the IRS can come after both, or either of them individually, for the entire tax liability).  But if one spouse is successful with his/her innocent spouse claim, then the IRS ceases collection of the tax debt as to that spouse. 

Historically the IRS innocent spouse program was not available to spouses who failed to file their claim for innocent spouse relief within two years from the date of the return.  However, the IRS has not enforced the two-year deadline at least since 2011.  And this week a proposal has been set in motion that would eliminate the two-year statute of limitation altogether.  Instead, an innocent spouse would have the full 10 years on the collection statute to file for tax relief.

Many of the taxpayers who are granted innocent spouse relief are victims of physical and/or emotional abuse.  These are people who probably did not do their due diligence in knowing what was on the return when they signed, but who were not in the best position to question what was on the return either.  They are people (usually women) who probably should have confirmed that the taxes were being paid, but who feared the repercussions of asking about it.  One thing that innocent spouses all have in common is that they were left in the dark about important financial information and decisions, including taxes.  So, later, when they get a bill or a collection notice, they are caught completely off guard.  The IRS recognizes that it isn’t fair to enforce the standard “joint & several” liability in these situations, and they appear to be moving in the direction of opening the innocent spouse program up to a lot more people.  Also, under the proposed rules, the IRS would not be permitted to take enforced collection actions while an innocent spouse application is pending.

IRS Procedure Gives Consideration to Spousal Abuse

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The IRS released a proposed revenue procedure (Notice 2012-8) that would loosen up some of the rules related to Innocent Spouse relief under Revenue Code section 6015(f).

Normally if a married couple files a return jointly then they are both equally liable (jointly and severally) for any outstanding balance on that tax year. However, if one spouse can show that he/she had no knowledge and had no reason to know that the other spouse was underreporting income or that the funds intended for payment of the tax were taken by the other spouse, then the IRS may impart tax relief to the innocent spouse.

One of the most significant changes has to do with the criteria that the IRS considers when reviewing an Innocent Spouse case. The IRS will now take into consideration all the facts and circumstances in Innocent Spouse cases, with no one factor or majority of factors necessarily controlling their determination. Also, some factors may weigh against the requesting spouse and some factors may weigh in his/her favor. But if the requesting spouse can prove marital abuse or lack of financial control, then it may, under the proposed procedures, mitigate those otherwise negative factors.

In layman’s terms:

Somebody in an abusive relationship does not need tax problems heaped on top of everything else going on in their life. If the requesting spouse was abused or prevented from participating in family finances, then Innocent Spouse relief may still be granted even if the requesting spouse had actual knowledge that there were problems with the tax return or that the taxes were going to go unpaid.

Interestingly, because the new revenue procedure expands equitable relief available to innocent spouses, it will be applied by the IRS immediately even before it is finalized.

TAS Takes Credit for Changes to Innocent Spouse Rule

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The National Taxpayer Advocate, Nina Olson, took a bow yesterday as the IRS announced removal of the two-year statute of limitations under the Innocent Spouse program. According to Olson, she and her staff have been advocating for this change for some time now because an “innocent spouse” is often unaware of the shenanigans of his/her spouse until after the two-year period has passed from the IRS’ first collection activity, and it is really not fair to hold them to a limitations period. To read Ms. Olson’s complete statement, click here.

IRS Throws out 2-Year Statute of Limitations for Certain Innocent Spouse Claims

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Today the IRS announced that it is removing the two-year limitations period for Innocent Spouse relief sought under the equitable provisions of Revenue Code section 6015(f). This change is effective immediately and also applies to pending cases and apparently even claims that were denied solely on the grounds that the statute of limitations period had expired. The standard requirements of an Innocent Spouse claim are found in section 6015(b)-(c). But if those provisions do not apply and it would be inequitable to deny Innocent Spouse relief given all the facts and circumstances, the petitioner may be granted relief under subsection (f). Prior to today’s announcement, a petitioner seeking relief under subsection (f) had two years to do it just like is required under 6015(b)-(c). This change should expand the availability of Innocent Spouse relief which is granted to taxpayers who can show that they did not know, and did not have reason to know that their spouse had either underpaid the joint taxes or had understated the income reported on the joint return.