Congress added section 6015 to the Code, to provide three escape hatches from the normal “joint and several liability” imposed on a joint return filers. Section 6015(b) provides innocent spouse relief to married or divorced spouses who qualify and Section 6015(c) (Procedures to Limit Liability) makes qualifying divorced spouses who so elect liable only for the portion of the joint tax liability attributable to their separate tax return items. Section 6015(c)(3)(B) provides that an election under Section 6015(b) or (c) “may be made at any time after a deficiency for such year is asserted but not later than 2 years after the date on which the Secretary has begun collection activities with respect to the individual making the election” (meaning first IRS collection notice).
A spouse ineligible for relief under 6015(b) or (c) may nonetheless seek “equitable relief” from “joint and several liability” under Section 6015(f). Although congress included no time limit for requesting “equitable relief”, the IRS issued regulations imposing the same two-year time restriction on claiming equitable relief as was congressionally mandated for the two other avenues for innocent spouse relief. The Tax Court three times found the regulation invalid but was reversed by the Seventh, Third and Fourth Circuit Courts of Appeal.
The IRS bowing perhaps to political pressure or coming to recognize problems with its implementation of the relief measure has reverse course and announced on July 25, 2011 (IR-2011-80) that, effective immediately, it will no longer follow the rule stated in the regulation limiting the time within which equitable relief may be requested to two years. IRS Commissioner Doug Shulman who’d previous indicated IRS was looking into changing its procedures regarding Innocent Souse requests, stated in the new announcement: “…it became clear that we need to make significant changes involving innocent spouse relief. This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face and today’s change will help innocent spouses victimized in the present and the future.”
Specifics of the new policy are detailed in Notice 2011-70 issued on the same date. Some of the highlights:
- Future requests: IRS will consider a request for equitable relief under section 6015(f) without regard to when the first collection activity was taken, if the period of limitations on collection of taxes (Section 6502 – normally 10 years from assessment) remains open for the years in issue. If the request involves a refund, however, the request must be made within the Section 6511 refund period of limitations (normally, within the later of three years from filing of the return or two years from the payment of the tax.)
- Pending requests: IRS will now consider the request even if made more than two years following the first collection activity so long as the collection period of limitation was open at the time, or, if involving a refund, the refund period was open at the time of filing the request for relief.
- Requests denied solely as filed late and not litigated: Such spouses may reapply by filing a new Form 8857, Request for Innocent Spouse Relief. As to amounts paid prior to the original filing, IRS will treat the request as a timely refund claim if the refund limitations period was open on the filing date of the original Form 8857, Amounts collected after the original Form 8857 was filed and unpaid taxes will be subject to the new procedures stated above.
- Requests in litigation: If the claim for relief if pending litigation, the spouse need not file a new Form 8857. IRS will take appropriate action in each case to approve or deny relief under the new policy stated above.
- Requests litigated and litigation is now final: IRS will under certain circumstances take no further collection action and the spouse need not file a new Form 8857: “If the IRS stipulated in the court proceeding that the individual’s request for equitable relief would have been granted had the request been timely.” (i.e., made within the two-year period stated in the formerly applicable regulation governing requests for equable relief under Section 6015(f).
- Limitation of applicability: The new policy only applies to request for equitable relief under Section 6015(f). The two-year limitation period continues to apply to requests filed under Sections 6015(b) or (c).
The IRS had earlier this year launched a thorough review of its entire innocent spouse program and additional guidance and changes are expected sometime in the fall.
Articles discussing all of the innocent spouse provisions are found on my website: www.steinbergtaxlaw.com.
© 2011 by Robert S. Steinberg, Esquire
All rights reserved.