Changes to Innocent Spouse Program may Become Permanent

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.

CSEDs – Part II

I have written about CSEDs before.  These are the statute of limitation periods in tax cases; the “Collection Statute Expiration Dates.”  In a previous blog post, I listed what kinds of events can suspend the CSED.  Here I would like to address a couple additional details.

1. Waivers / Extensions (IRM

If you are asked to sign a CSED waiver or extension, you are essentially agreeing to give the IRS additional time (beyond the standard 10 years) to collect the tax from you.  You are giving up the tax relief available to you at the end of the tunnel.  Before the 1998 tax reform, IRS revenue officers were essentially free to secure CSED waivers under any circumstances imaginable.  Also, there were no restrictions on how many waivers could be obtained from the same taxpayer or how far into the future the CSED could be extended.  Today CSED waivers have gone almost completely out of fashion, although some are still obtained in connection with installment agreements as required by law.

2. Substitute for Return (IRM

A Substitute for Return (SFR) is an IRS-filed return that leaves out important exemptions or expenses you may be entitled to and may overstate your real tax liability.  Some believe that if a taxpayer goes back and files his own original return, this action automatically resets the CSED for that particular tax year.  This is not necessarily the case.  If the original taxpayer-filed return results in a lower liability, the original CSED remains intact.  And if the original return results in a higher liability, the CSED is updated (extended) only on the additional assessment.  A fine distinction, but an important one nonetheless.

"Collection Statute Expiration Dates"

photo via

Many of our tax relief clients know from personal experience that the IRS can very persistently chase taxpayers around for years trying to collect what is owed.  But the Statute of Limitations (SOL) prohibits the IRS from pursuing a taxpayer indefinitely.  Once the SOL is up, the tax debt “expires” and the IRS can no longer collect the debt.

The SOL for collection of a back tax debt is 10 years from the date of assessment.  Since each tax period/form is filed and assessed on different dates, each tax period normally has a different expiration date.  In the jargon of IRS Collections, this is called the Collection Statute Expiration Date (CSED).   See IRS Pub 594 for further details.

In a perfect world, a 2008 tax return is filed and assessed in April 2009 and then expires in April 2019.  However, there are a number of events that can toll (or extend) the SOL on a back tax debt:

  • IRS investigation of a request for Installment Agreement
  • IRS investigation of an Offer in Compromise
  • Appeals determination
  • If you live outside the US for a period of 6 months or more
  • Bankruptcy (SOL tolled while the automatic stay is in effect)
  • IRS Collection Due Process hearing
  • Tax Court Proceeding
  • Request for Innocent Spouse Relief

Some of these procedures can last several months, which automatically adds the same number of months to the SOL.  Anytime a taxpayer is considering one of the listed procedures, he/she should also take into account how it will affect the CSEDs.  An experienced tax attorney can help with this important analysis.

Supreme Court Rules in Favor of Taxpayer on Assessment Statute Question

How many years should we be concerned about the possibility of an IRS audit?  Most people realize they are in the clear for taxes they filed in the 1990s.  The IRS can’t come back and audit you a decade later because audits and additional assessments are time bound by a 3-year statute of limitations.  In most cases you are in the clear after 3 years from the time you file or from the due date of the return.  However, there is an exception that allows the IRS to double the statutory period in cases where the taxpayer understates gross income by 25% or more.  The whole concept of understating income by 25% can be fairly convoluted as evidenced by the wide variations in how appellate courts have decided the question over the years.

But the highest court in the nation has recently sided with the taxpayer in a case that was expected by many to go the other way.  It was a tax shelter case.  The IRS wanted 6 years, but the Supreme Court ruled that the standard 3-year rule applied.  Some see this as a big win for taxpayers.  Apparently the circumstances that would allow the IRS to stray from the 3-year rule are fairly narrow.