IRS Proposes To Permanently Ease Restrictions For Innocent Spouse Relief

Kelly Phillips Erb for Forbes writes: Mary (not her real name) was married to a man who abused her for years. When things were good, she said, they were really good. But her husband had a temper and he was physically intimidating: as their financial situation got worse, he would increasingly become violent. She stayed, she said, because she wasn’t sure what else to do. She feared for her children – her daughter was exhibiting signs of mental stress and had developed an eating disorder – but Mary had no real income of her own to support them. She had no assets, no savings, nothing to fall back on. She had thoughts of leaving but she couldn’t bring herself to do it. She didn’t have to: one day, her husband simply walked out, leaving her, she thought, with nothing.

Mary didn’t have time to think about how terrible her situation was: she needed to provide for her children. She found housing and a job. She relied on the kindness of others for a bit, including a local church, who helped her get back on her feet. Eventually, it seemed, things were looking up. She was making enough to pay most of her bills and more importantly, her children had a safe home.

It turned out, however, that her husband, hadn’t exactly left her with nothing. One day, she received a notice from the Internal Revenue Service advising her that she owed taxes. A lot of taxes.
As Mary investigated further, she found that while her husband had filed for most years, he had not remitted payment for most of those years. She had no idea. She had dutifully signed the returns – without ever reviewing them – and had assumed that they were being taken care of. When I later asked her why she never followed up, she became quiet. Most of their fights, she said, were about money. And it made him angry if she questioned how he handled the money. So she simply stopped asking.

She landed on the IRS’ radar screen because she was now earning a paycheck. Since she had previously filed her tax returns as married filing jointly, the IRS took the position that it could collect all of the debt from her wages. That, she told me, wasn’t fair. It was, however, the law.
She filed an application for innocent spouse relief with mixed results. The IRS was inclined to grant her application but her now ex-husband had other ideas. He waltzed back into Mary’s life for just a moment: to file objections for her request for relief. I met him and could understand how she would be frightened. He was a hulk of a man, looming far over my own 5’2″ frame. Mary was so scared of him that she was shaking and found it hard to tell her story; the attorney for the IRS graciously put him in one room and Mary in another during the proceedings.

In the end, Mary won most of her argument. It was, at the time, a rare victory: proving entitlement to innocent spouse relief has traditionally been a fairly steep burden for taxpayers.
Over the past two years, however, the IRS has made marked progress in how it treats taxpayers claiming innocent spouse relief. Last year, the IRS gave many taxpayers cause for hope when it released Notice 2012-8 (downloads as pdf), which “significantly lowered the bar for innocent spouse relief.” Among the issues address in the Notice is the issue of abuse, which had been treated unevenly by the IRS in absence of firm evidence of physical abuse. Now, the IRS acknowledges that:

Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws. All the facts and circumstances are considered in determining whether a requesting spouse was abused.

But not all taxpayers who are entitled to innocent spouse are victims of abuse. A number of other factors are taken into consideration when determining innocent spouse relief including the omissions of income by a spouse or overstating and fabricating deductions. Each taxpayer is supposed to review the tax return for accuracy before signing the return so the assumption is that you knew or had an obligation to know what information is on the return. Further, each taxpayer has an obligation to ensure that tax obligations are satisfied. By law, when you file a joint tax return, both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce.

You can imagine, then, that timing, in particular, could be a problem. The IRS has ten years to collect a debt after it is assessed (this is in addition to the time frame for audit and exam) but under prior rules, spouses had a much shorter deadline in which to claim relief. Specifically, the IRS had only allowed taxpayers two years to file for innocent spouse relief.

This week, the IRS proposed to make permanent rules to extend the amount of time taxpayers can apply for equitable relief through an innocent spouse application. Under the proposed rules, taxpayers would have up to ten years – or generally, the same time frame as IRS has to collect – to file for equitable relief. If the taxpayer is making a claim for refund, the statute of limitations for refund would apply.

I use the phrase “to make permanent” since the IRS was already generally extending the deadline as announced in 2011 as part of Notice 2011-70 (downloads as a pdf). That Notice was issued after a series of cases, the most famous being Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010), which challenged the two year deadline. The IRS won some and lost some when it came to those cases, but eventually acquiesced, issuing the Notice to extend the deadline in most cases.
Now, the IRS has issued proposed regulations, REG-132251-11 (downloads as a pdf) which would permanently adopt those deadlines. If approved, the regulations will be considered effective as of the date of Notice 2011-70 which means that they would apply to applications for innocent spouse relief filed on or after July 25, 2011.

The proposed regulations – which are 25 pages long – also address issues raised in community property states as well as clarifying what constitutes “collection activity” for purposes of starting the deadline for relief.

If you think these rules apply to you – or if you want to re-apply under the new rules – you submit an application by filing federal form 8857, Request for Innocent Spouse Relief (downloads as a pdf). For more information, contact your tax professional or call the IRS at 1.800.829.1040.
But be careful: this is not the same form you use if you are an injured spouse. You are an injured spouse if your share of your tax refund as shown on your joint return was, or is expected to be, applied against your spouse’s past-due federal debts, state taxes, or child or spousal support payments. If you are an injured spouse, you may be entitled to get your share of the refund released to you. To apply for injured spouse relief, file a federal form 8379, Injured Spouse Allocation. (downloads as a pdf)

One final word – and this is the point where I sound like your mother. Everyone is entitled to dignity and self respect. No one ever deserves to be intimidated, humiliated, threatened or hurt. While financial security is important, personal security is more important. If you are the victim of domestic abuse, help is available. Please call 1-800-799-SAFE (7233). It can and does get better. You just have to have the courage to say, “Enough.”