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“Innocent Spouses” – IRS Introduces New Guidelines for Tax Relief | New Rules Innocent Spouse | Innocent Spouse Relief August 12, 2012

Posted by Insight Law Firm in IRS, Tax.
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There are multiple sections under which taxpayers may seek to eliminate tax liabilities attributable to their spouses or former spouses.  However, for many taxpayers, seeking “equitable relief” under IRC § 6015(f) becomes their only option due to the stricter time limitations of other sections.

In determining whether to grant equitable relief under this section, the IRS considers each individual’s facts and circumstances and then determines whether it would be inequitable to hold the requesting taxpayer liable for the tax deficiency.

Taxpayers seeking relief pursuant to this section now are likely to see major benefits under proposed revisions to the Internal Revenue Service procedures used to grant and deny these requests.

New Threshold Requirements

A requesting taxpayer must meet some threshold requirements to receive relief under this section.  Specifically, the taxpayer must demonstrate each of the following facts:

(1) The taxpayer filed a joint return for the tax year at issue;

(2) The taxpayer is ineligible to seek innocent spouse relief under § 6015(b) or 6015(c);

(3) The taxpayer has timely filed a claim for relief;

(4) The taxpayer has not transferred assets with his/her spouse pursuant to a fraudulent scheme;

(5) The taxpayer did not receive “disqualified assets” from his/her spouse;

(6) The taxpayer did not knowingly participate in filing a fraudulent return with the IRS; and

(7) The taxpayer seeks relief from liability that arose from a tax attributable to an understatement or underpayment of the spouse’s income.

New “Streamlined” Determinations after Initial Administrative Review

Under the newly released guidelines, Taxpayers seeking relief may be granted a streamlined determination in their favor if they meet the threshold requirements above and all of the following circumstances are met:

(1) The taxpayer is no longer married to the other spouse;

(2) The taxpayer would suffer economic hardship if relief was not granted; and

(3) The taxpayer either did not know or have reason to know that his/her former spouse made an understatement on their joint tax return or would not or could not pay any tax deficiencies, OR the taxpayer was unable to challenge his/her former spouse due to abuse or financial control of the former spouse.

Clarification of Equitable Factors 

For taxpayers who do not meet the requirements to be granted a streamlined decision in their favor, the IRS will evaluate requests based on a number of equitable factors.  Several factors will continue to be considered, including: marital status of the taxpayer, economic hardship faced by the taxpayer if relief isn’t granted, the taxpayer’s knowledge of an underpayment or understatement, any legal obligations of the taxpayer or other spouse to repay the deficiency, any significant benefits the taxpayer received from the deficiency, and the taxpayer’s compliance with income tax laws.  Specific considerations revised or clarified by the new revenue procedures include:

  • WEIGHING OF FACTORS: Any number of additional factors may be considered, and no single factor a combination of factors alone may control the determination.  The IRS may grant relief even when several factors weigh against relief, or, conversely deny relief even when several factors weigh in favor of relief.
  • KNOWLEDGE & ABUSE:  Knowledge of an understatement or underpayment will not weigh more heavily than any other factor.  Additionally, in cases involving abuse or financial control, this factor may weigh in favor of relief despite a taxpayer’s knowledge of an understatement or underpayment.
  • USE OF FACTORS: The “marital status” and “economic hardship” factors can only help eligible taxpayers and not harm other taxpayers.  The factors will weigh in favor of      relief for divorced/separated taxpayers and taxpayers facing economic hardship but will remain neutral for other taxpayers.  Other factors, including “compliance with income tax laws” may continue to be used to help or hurt a taxpayer’s case.

The new guidelines above are among the many proposed revisions introduced by the IRS this year and will be in place until the IRS publishes final new regulations on the subject.

Taxpayers interested in pursuing a request for innocent spouse relief under § 6015(f) should discuss the effect of these changes on their arguments with a local tax attorney.

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Washington taxpayers may schedule a free consultation to discuss their options with Insight Law by calling (206) 397-4780 or visit our website link below to speak with a tax attorney.

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Innocent Spouse | Equitable Relief – Lantz v. Commissioner: 7th CIRCUIT REVERSES TAX COURT – UPHOLDS TWO-YEAR TIME LIMIT FOR EQUITABLE RELIEF UNDER 6015(f) May 13, 2012

Posted by Insight Law Firm in Income Tax, IRS, Tax.
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When spouses file joint tax returns, each is generally joint and severally liable for any tax due in that year, including the full amount of taxes due, penalties, and interest. This means that the IRS may pursue the whole amount due from both spouses or any one of the spouses individually. However, under Section 6015(f), an “innocent spouse” who signed an erroneous return without knowing or having any reason to know of the misstatements on the return may request to be relieved of additional taxes and penalties the IRS seeks to collect as a result of these misstatements.
Unlike Section 6015(b) and (c), Section 6015(f) does not contain any time limitation by which a taxpayer must claim this type of relief. Despite this, the Department of Treasury enacted a regulation to impose this same limitation on equitable relief claims under 6015(f). When the IRS enforced this regulation against several “innocent spouses,” this regulation was challenged. The U.S. Tax Court sided with taxpayers. The Tax Court reasoned that since 6015(f) doesn’t expressly state a time limit, the Treasury lacked authority to impose the two year limit.

However, the Seventh Circuit Court of Appeals reversed this decision, holding the IRS cannot impose its two-year limitation on innocent spouse relief claims under Section 6015(f). The Court ruled that even though Section 6015(f) does not contain a time limit, Congress expressly granted the Treasury broad authority to promulgate regulations to administer Section 6015(f). Therefore, its regulation adding a two-year time limit, which appears in surrounding areas of the code, was not improper.

While this Seventh Circuit case is only binding on taxpayers in Illinois, Indiana, and Wisconsin, the IRS will continue to try to enforce its two-year time limitation in every other state as well, but the Tax Court has specifically not followed this decision outside of the 7th Circuit. This means innocent spouses wanting to fill outside this two-year time period could possibly face an uncertain battle in those states, and possibly others in the future.

If you need a Tax Attorney in Seattle, call (206)397-4780, or click the Tax Lawyer link below to visit our website.

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