Source: http://fidjlaw.com/irs-makes-significant-changes-to-innocent-spouse-relief/
Timestamp: 2020-01-17 16:37:08
Document Index: 341727052

Matched Legal Cases: ['§ 6015', '§ 3510', '§ 6015', '§ 6015', '§ 6015', '§ 6015', '§ 6015', '§ 6015', '§ 6015', '§ 6015', '§ 6015']

IRS Makes Significant Changes to Innocent Spouse Relief -
Home/Blog/Tax Law/IRS Makes Significant Changes to Innocent Spouse Relief
Innocent spouse relief is set forth in § 6015 of the Code. Generally, three types of relief are potentially available, depending on the individual spouse’s circumstances. Each of the three bases for relief has unique characteristics, but there are some universal conditions which must be met before any of the three types of relief can be utilized. First, there must a valid joint return (i.e. the taxpayers’ marriage must be valid, the signature of a spouse cannot be forged or coerced). Without a valid joint return, there is no joint and several liability. Second, the request for relief, form 8857, must be timely filed. In most circumstances, the deadline to file is two years from when the IRS first begins collection action. However, as explained below, the time limit may be different depending on which basis for relief the spouse invokes in his or her request. Third, the liability must arise out of income taxes. Most taxes required to be included on a joint return are income taxes, so this requirement is usually not a significant obstacle. One example of a tax that is required to be reported on a joint return but is not considered income tax is the tax imposed on domestic employment service (i.e. working in the employer’s private home) by § 3510 of the Code. Fourth, a court cannot have rendered a judgment as to the liability of the spouse requesting relief (hereinafter “requesting spouse”). If the requesting spouse participated in a proceeding regarding the liability and had a chance to request relief but failed to do so, relief is also precluded.
Once these threshold requirements are met, it is necessary to determine which specific type of relief under IRC § 6015 is potentially available to the requesting spouse.
A determination of whether a spouse had reason to know of the understated tax, thus precluding that spouse from taking advantage of § 6015’s equitable relief, is based on factors such as the educational background of the requesting spouse, the business experience of the requesting spouse, and whether the erroneous item represents a departure from a recurring pattern in previous tax years. This is not an all or nothing proposition””a spouse can be aware of some erroneous items (and thus remain jointly and severally liable for those items) but still gain equitable relief for other items of which he or she was not aware.
In determining whether it is unfair to hold a spouse jointly and severally liable, the IRS will look to several factors, including whether the claiming spouse benefitted from the understated tax (for instance, by living a lavish lifestyle while tax liabilities went unpaid), whether the parties were divorced, and whether one spouse deserted the other.
It is also important to note that relief under § 6015(b) does not provide relief for underpayments of tax. For example, if the return states a tax due of $5,000.00 and only $3,000.00 is paid, § 6015(b) would be unavailable to a spouse seeking relief from the balance of $2,000.00, regardless of any of the innocent spouse factors.
In the event a spouse does not qualify for relief under IRC §§ 6015(b) or (c), the spouse may still pursue relief under the catchall of IRC § 6015(f), generally described as “equitable relief.”
Equitable relief under this provision is unique in that it can provide relief from both an understatement of tax and an underpayment of tax.
The non-requesting spouse cannot have transferred “disqualified assets” to the requesting spouse. A “disqualified asset” is one that was transferred to the non-requesting spouse with the principal purpose of the avoidance of tax or payment of tax. A presumption arises that an asset is disqualified if it is transferred within a year of the IRS contacting the taxpayers about a proposed deficiency.
Once the threshold requirements for relief under § 6015(f) are met, the next determination the IRS will make is whether the case is “streamlined” or not. Under newly issued IRS guidelines, set forth in Rev. Proc. 2013-34, equitable relief cases under IRC § 6015(f) are divided into streamlined and non-streamlined categories. If a case is streamlined, relief is generally granted. A case is considered streamlined if all of the following conditions are met:
Rev. Proc. 2013-34 primarily altered the substantive analysis the IRS will undertake when determining whether a requesting spouse is entitled to equitable relief. Keep in mind that the changes set forth in Rev. Proc. 2013-34 are most relevant when a case is not “streamlined” and the IRS is therefore required to engage in a balancing test to determine whether holding the requesting spouse liable would be inequitable.
The changes set forth in Rev. Proc. 2013-24 are almost uniformly taxpayer-friendly. More than anything, these changes represent awareness on the IRS’s part of the severe hardship spouses in abusive or domineering relationships face. Below is a brief summary of the significant changes:
The determination of whether economic hardship would result if equitable relief were denied was modified to be based on minimum standards of income, expenses, and assets. Further, a finding that economic hardship will not result from a denial of the requested relief does not, in and of itself, weigh against a granting equitable relief as it previously did. Instead, it is now treated as neutral factor.
A finding that the requesting spouse had actual knowledge of the item causing the understatement is not weighed more heavily than other factors, as it was previously. Additionally, if the requesting spouse did not challenge the non-requesting spouse’s treatment of any tax items out of fear of retaliation, then even actual knowledge of improper treatment of an item will not preclude equitable relief.
Similarly, abused spouses, or those spouses with no control over financial decisions, will not suffer from having the “significant benefit” factor weigh against them in the determination of equitable relief.
A legal obligation of the requesting spouse to pay the liability is taken into consideration. Previously, only whether the non-requesting spouse had a legal obligation to pay the liability was taken into account.
ii. Procedural Modifications
Additionally, recent changes to the application of IRC 6015(f) have eased time constraints on filing relief requests. Whereas previously claims for equitable relief had to be filed within two years of the IRS’s first attempt to collect the liability (as is still the case under IRC §§ 6015(b) and (c)), in IRS Notice 2011-70, the time period was extended to match the IRS’s general collection deadline of 10 years after the assessment of the liability. This provision was recently adopted as part of a proposed treasury regulation, and is likely to become final regulation. We previously blogged about this change here and here.
The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers facing tax deficiencies and IRS collection efforts. We will continue to monitor the development of innocent spouse relief under the Internal Revenue Code, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fidjlaw.com.