IRS Seeks to Ease Rules for Innocent Spouses
by Terri Eyden on
By Ken Berry
The IRS is moving forward in its efforts to provide more leeway under the "innocent spouse" rules. On August 12, the IRS proposed a permanent extension of the rule allowing taxpayers up to ten years, as opposed to the usual two-year period, to apply for equitable relief. The proposal is designed primarily to protect spouses – particularly single mothers in abusive situations – from joint and several tax liability.
Back in 2011, the IRS announced that it would no longer apply the two-year limit on collection activities for new requests and would allow taxpayers to take up to ten years to request equitable relief. Now the IRS is formally incorporating the change into regulations and making it permanent. The IRS has invited public comment on the proposals, so it isn't clear when the rules will be finalized.
This latest move comes as critics in Congress complain that the IRS isn't giving victims of domestic abuse and others in dire straits enough time to get out from under heavy tax debts accumulated by a deceptive spouse. It's estimated that approximately 50,000 taxpayers apply for relief each year under the program.
How Do You Spell Relief?
The IRS has established the following requirements for qualifying for innocent spouse relief:
- The taxpayer filed a joint return that has an understatement of tax;
- The understatement of tax is due to erroneous items of the taxpayer's spouse;
- The taxpayer establishes that he or she did not know – or had reason to know – there was an understatement of tax when the return was filed;
- Taking into account all of the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement; and
- The relief is requested within ten years after the IRS started its collection activity. Previously, a taxpayer only had two years to make such a request (see main article).
The basic premise is well-known by most tax practitioners. Although married taxpayers generally benefit by filing a joint return, each spouse is still "jointly and severally" responsible for any tax, interest, and penalties attributable to that return. This means that the IRS can pursue either spouse, or both, for unpaid taxes, even if they should subsequently obtain a divorce. To avoid this harsh result, a taxpayer may qualify for relief under the innocent spouse rules, as long as certain requirements are met (see sidebar).
Don't confuse innocent spouse relief with an "injured spouse" claim. A taxpayer is an injured spouse if he or she files a joint return and any share of the refund was, or will be, applied against separate past-due federal tax, state tax, child support, or federal nontax debts (e.g., a student loan) of the taxpayer's spouse. An injured spouse may be entitled to recoup his or her share of the refund.
The new proposals would also prohibit the IRS from demanding unpaid taxes while an application is being processed. But the IRS hasn't yet proposed formal rules spelling out all the qualifications for the revised rules.