The Continuing Evolution of the New Innocent Spouse Rules as Implemented and Interpreted by the Internal Revenue Service and the Courts: Part II

Part II of the innocent spouse rules is about equitable relief under §6015(f). This means that if an innocent spouse doesn’t qualify for relief under other sections, the IRS can still choose to grant relief if it’s unfair to hold them responsible for unpaid taxes. This is different from other relief because it can apply to correctly reported but unpaid taxes, not just underreported taxes. The IRS has the discretion to grant equitable relief to innocent spouses who filed joint tax returns. To be considered for relief, the innocent spouse must meet certain criteria, such as filing a timely request and not benefiting from the tax understatement. Factors weighing in favor of relief include economic hardship and being abused by the other spouse. Factors against relief include knowing about the tax issue and benefiting from it. If the IRS denies equitable relief, the innocent spouse can appeal to the Tax Court, but it may be difficult to overturn the decision. The IRS has proposed new regulations for innocent spouse relief, which can help people who are unfairly held responsible for their spouse’s tax debts. The regulations clarify what it means to have knowledge of a mistake on a tax return, how joint ownership of assets affects innocent spouse relief, and how assets transferred between spouses can impact the relief. They also explain how income and deductions will be split between spouses seeking relief. The final regulations are still being approved, so there may be changes based on feedback and court decisions. Overall, the proposed regulations seem to make it easier for innocent spouses to get relief from tax debts. To file a claim for innocent spouse relief, you need to fill out Form 8857 and send it to the Internal Revenue Service at the Cincinnati Service Center. They have a special team to handle these claims. Since the law changed, there have been a lot of claims filed, but many of them were rejected because they didn’t meet the requirements. If your claim is approved, it could help with unpaid taxes or other issues. The IRS doesn’t have specific numbers on how many claims are denied, but the process is long, taking at least 205 days. It can take even longer if things aren’t done right. The IRS is working on a new computer tool to help process claims faster. If someone is a victim of domestic abuse, they can file a claim with a note to keep their address private from their abuser. The IRS and the American Bar Association are working together to help victims of domestic abuse get the relief they need. When you file a claim for innocent spouse relief with the IRS, it can pause the time they have to collect any unpaid taxes from you. This is because the IRS stops trying to collect from the innocent spouse until a decision is made on the claim. However, this doesn’t apply to claims for equitable relief. It’s important to consider how much time the IRS has left to collect the taxes before filing a claim, so you don’t accidentally extend the time limit. Also, make sure to file your claim within two years of the IRS starting to try to collect the taxes. And don’t file a claim before you hear from the IRS about an audit or a notice of the taxes you owe. The innocent spouse provision in tax law allows one spouse to be relieved of responsibility for unpaid taxes if the other spouse is at fault. The process for seeking relief can be intimidating, and the noninnocent spouse has the right to be involved in the proceedings. The rules for refunds and attorney fees in these cases are complex and may not always work in favor of the innocent spouse. Overall, the application of the innocent spouse criteria has been difficult and the IRS has struggled to handle the high number of requests for relief. As taxpayers, we want the IRS to make sure they don’t give relief to the wrong person, but they also need to help those who really deserve it. The courts will decide how to balance this. It seems like the IRS is waiting for the courts to decide before they make their own decisions. It’s important for innocent spouses to be able to challenge the IRS’s decisions in court, and for the IRS to follow the court’s decisions. “Under IRS rules, spouses may be able to get relief if it’s not fair to hold them responsible for unpaid taxes or if they live in a community property state. There are specific procedures to follow, and the IRS considers all the facts and circumstances before deciding. There have been court cases where relief was granted or denied based on different factors. It’s important for both spouses to consider getting separate legal representation if there’s a conflict of interest. The IRS also has specific rules and procedures for handling these cases.” Frances D. Sheehy and Anthony J. Scaletta are lawyers who specialize in tax law and helping people with issues involving the IRS. They are experts in their field and have received advanced degrees in law and taxation. They also received assistance from the Internal Revenue Service for the information in their article. The article was submitted on behalf of the Tax Section of the Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/the-continuing-evolution-of-the-new-innocent-spouse-rules-as-implemented-and-interpreted-by-the-internal-revenue-service-and-the-courts-part-ii/