IRS ends rule that hurt 'innocent spouses'

By AccountingWEB staff

A rule that disqualifies taxpayers from being considered innocent spouses if they don't file for relief within two years has been eliminated, effective immediately, the IRS announced.

These innocent spouses, who filed joint returns, may have been liable for their partner's tax debt under the old rules. The two-year deadline prevented abused women and others, who were otherwise qualified, from getting what is called equitable relief from the tax agency.

"This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers," IRS Commissioner Doug Shulman said in a published statement. "We know these are difficult situations for people to face, and today's change will help innocent spouses victimized in the past, present, and the future."

Under the old rules, IRS denied applicants who missed the deadline.

As Forbes tax blogger Robert W. Wood put it, "Up until now, the IRS required claims for innocent spouse relief within two years of first IRS collection activity. But you might have no idea the IRS was trying to collect if your spouse was concealing it! Previously, the IRS said that was too bad: two years is two years."

The Wall Street Journal reported an example of someone snagged by the provision. Cathy Marie Lantz was married to Indiana dentist Richard Chentnik, who was arrested and convicted of Medicaid fraud, resulting in a $900,000 bill from the IRS. Her husband told her he had handled the issue, so she didn't file for innocent spouse relief. He died shortly afterward. A federal appeals court came down in favor of the IRS, but the agency decided on its own to make the change.

National Taxpayer Advocate Nina Olson and a group of lawmakers have been pushing for the change. Olson called the IRS move, "a welcome occasion where everyone has emerged a winner," The Hill reported.

The IRS is encouraging taxpayers who were denied relief based solely on the two-year rule to reapply. The rule will apply to past and current cases. Even if IRS litigation over innocent spouse relief is final, the IRS may suspend collection activity.

You can read the details of the new rule.

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