Source: http://unclefed.com/AuthorsRow/BJHaynes/icupdate.html
Timestamp: 2019-04-18 16:26:47+00:00

Document:
When we left our friends, Rhett and Scarlett (in the article which appeared in ____ - _____ 1999 issue of The Free State Accountant), they were contemplating the relief Scarlett could obtain under the new innocent spouse rules enacted by the IRS Restructuring and Reform Act of 1998. In the months since that article was published, there have been several important pronouncements from the IRS interpreting and implementing the new innocent spouse rules. In addition, an important deadline for seeking innocent spouse relief is almost upon us. This article will present what you need to know to stay current on the innocent spouse rules, and to avoid getting stung by the pending deadline.
First a brief review. The point of the innocent spouse rules is to limit the "joint and several liability" which normally results from the filing of a joint income tax return.2 The Act added §6015 to the Internal Revenue Code, replacing the old innocent spouse rules found in §6013(e). Two principal forms of relief are available: one for all joint filers, and the other for those who are divorced, or widowed, or separated. In addition, it is also possible to escape liability if the IRS, in its administrative discretion, finds that it would be "inequitable" to hold the taxpayer liable.
The innocent spouse establishes that she "did not know, and had no reason to know," of the tax understatement, and that "taking into account all the facts and circumstances, it is inequitable" to hold her liable.
The requesting spouse seeks relief in the manner prescribed by the IRS3 within two years of the commencement of collection action against her.
If the requesting spouse is divorced, widowed or separated, relief is even easier to obtain. Under §6015(c) and (d), such a spouse may simply elect to separate responsibility for the deficiency on a "proportional" basis, as though separate returns had been filed in the first place. Any item giving rise to a deficiency is allocated to the appropriate spouse. The election to separate the liability in this fashion must be filed within two years of the time the IRS begins collection action against the spouse seeking relief.
From the above recitation of the rules, you have no doubt already spotted the deadline. Act §3201(g)(2) provides that the two year period for filing a claim for relief under either §6015(b) or (c) starts with the first collection action taken against the taxpayer after the date of enactment. Enactment occurred on July 22, 1998, when President Clinton signed the Act.
The IRS Collection Division, of course, is out there taking enforcement action against somebody every day. Thus, starting July 22, 2000, some taxpayers will start losing their right to seek innocent spouse relief for the simple reason that they (or their advisors) waited too long.
Consider the following mildly preposterous example: On July 1st, Scarlett comes to see you. She explains that for many years prior to her divorce from Rhett in 1996 they filed joint returns, and that the IRS assessed large deficiencies after determining that Rhett's plantation business was really a hobby farm. A lien was filed against Scarlett on August 2, 1998, but she talked Revenue Officer Sherman into posting her account "currently not collectible." The IRS isn't doing anything to Scarlett at present, but she wants to resolve this once and for all because she is looking for venture capital to finance an IPO for her new website, called "Kissmygrits.com," figuring to be the next internet millionaire. You put the file aside, planning to get back to it after taking care of all the 1999 1040s you extended to August 15th.
The new innocent spouse rules focus mainly on tax "deficiencies," as opposed to balances shown as due on joint returns but simply never paid. However, one portion of the new rules offers at least the hope of some relief for any balance due with respect to a joint return, even when relief would not be other-wise available. Specifically, new §6015(f) permits the IRS to waive "any unpaid tax or deficiency (or any portion of either)," if in light of all the facts and circumstances "it is inequitable to hold the individual liable."5 The IRS was directed to adopt implementing rules, which it did on January 31, 2000, when it issued Rev. Proc. 2000-15. The Rev. Proc. contains two items which warrant close review. First is a list of "threshold conditions" which must be satisfied by all claims for equitable relief, and the second is a list of conditions "under which relief under §6015(f) will ordinarily be granted."
Relief is not available under §6015(b) or §6015(c).
The liability remains unpaid (except that a refund will be considered for payments made after July 22, 1998, and before April 15, 1999).
No assets were transferred between the spouses as part of a fraudulent scheme.
No disqualified assets were transferred to the requesting spouse by the nonrequesting spouse.
The requesting spouse did not file the return in question with fraudulent intent.
Even if these threshold conditions are met, of course, it must still be shown that holding the requesting spouse liable would be "inequitable."
The spouses are no longer married (i.e. due to divorce or death), or have been separated for 12 months.
When the requesting spouse signed the return in question she did not know and had no reason to know that the tax would not be paid.
The requesting spouse would suffer economic hardship if relief is not granted.
No knowledge or reason to know. Though not a "thresh-old" condition, a spouse's claim for equitable relief is advanced if she can show that she did not know and had no reason to know that the tax would not be paid, or that the return contained errors giving rise to the deficiency at issue, and that such errors were attributable solely to the nonrequesting spouse.
Conversely, the absence of the above-listed conditions would weigh against the granting of equitable relief. In addition, Rev. Proc. 2000-15 states that certain other factors would make it more difficult to obtain relief. These include the failure to comply with the requesting spouse's filing or tax payment obligations for years after the year or years for which relief is being sought.
The new innocent spouse rules are a vast improvement over the situation prior to the enactment of the IRS Restructuring and Reform Act of 1998. The IRS, however, has taken every opportunity to interpret the new rules as narrowly as possible. This is especially true of the "equitable" relief provisions of §6015(f), which Congress meant to cover cases which didn't fit the other two forms of innocent spouse protection. In the face of this administrative reluctance to allow relief if there is any conceivable way to avoid it, the successful and timely assertion of an innocent spouse claim requires creativity, diligence, and a complete understanding of the Code and the IRS's implementing pronouncements.
Mr. Haynes is a tax lawyer in Burke, Virginia. From 1973 to 1981 he served as a Special Agent with the IRS Criminal Investigation Division, and in 1980 was named "Criminal Investigator of the Year" by the Association of Federal Investigators. He specializes in civil and criminal tax disputes and litigation, and the tax aspects of bankruptcy and divorce.
An innocent spouse claim must be distinguished from "injured spouse" relief, which can be available when the IRS offsets a refund due on a joint tax return to collect taxes owed by only one of the spouses.
In October 1999, the IRS issued the current version of Form 8857, Request for Innocent Spouse Relief, pursuant to the Congressional mandate to create a new form to facilitate the filing of innocent spouse claims. More generally, the Service has also released Pub. 971 explaining the new innocent spouse rules. In addition, a set of "Innocent Spouse Questions and Answers" is on the IRS website.
Remember, if your client is denied relief by the IRS, she might seek it somewhere else -- like from your insurance carrier. The tax professional's rule for survival is to think of today's client as tomorrow's malpractice plaintiff.
Despite this broad statutory language, the IRS has decided in its infinite wisdom that even equitable relief under �6015(f) should be denied for a deficiency which was the subject of a closing agreement, including a closing agreement negotiated prior to the Act, when there would have been no reason to raise the innocent spouse issue because relief would not have been available under prior law. This is a grossly unfair result, but the only hope for rectifying this appears to be the further amendment of �6015 by the Congress.
Note that the two year deadline discussed above is expressly referenced by the Service here, so that a taxpayer who waits more than two years from the date of the first collection action against her to seek innocent spouse relief is completely out of luck, even as to equitable relief. A close reading of �6015(f) suggests that this is not a result mandated by the statutory language, but rather is another example of the IRS interpreting the innocent spouse rules in the narrowest possible manner. A court challenge to this position is not likely, however, because the Act does not provide for judicial review of decisions by the IRS in the exercise of its administrative discretion under �6015(f).
In his last annual report to Congress, the IRS National Taxpayer Advocate mentioned the failure of the Internal Revenue Code to recognize the allocation of responsibility for taxes in divorce decrees as the source of ongoing problems. The full report can be found at www.irs.ustreas.gov/plain/ind_info/rpt99.
Regs. �301.6343-1(b)(4) requires the consideration of the taxpayer's age, employment status and history, ability to earn, number of dependents, the amount reasonably necessary for food, clothing, housing (including utilities and insurance), medical expenses, transportation, and current taxes, expenses necessary for the production of income, child care payments, extraordinary expenses such as special education costs, and "any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director." This should sound quite familiar, since it is the same analysis the Collection Division makes in any other case. Not surprisingly, a Revenue Officer handling a claim for �6015(f) innocent spouse equitable relief will demand the submission of a Form 433-A Collection Information Statement detailing the taxpayer's assets, liabilities, income and personal living expenses, and will apply the same national and local standards used in the analysis of installment agreements and offers in compromise.

References: §6015
 §6013
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 §3201
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