Few people realize that when they sign and file a “joint” income tax return they are, in effect, signing a promissory note to the United States Treasury.
This can lead to some very unfair results.
Back in the 1970s Federal law was enacted to give relief to “innocent spouses.” As you can imagine it can be difficult to get the IRS and courts to agree that the innocent spouse should be relieved from the joint liability. This law has evolved significantly over the years.
In an unusual turn of events the IRS earlier this year eased the rules for a specific type of innocent spouse relief called “Equitable Innocent Spouse Relief” under IRC § 6015(f). The IRS rules are explained in IRS Notice 2012-8 . Below is a list of the significant changes to Equitable Innocent Spouse Relief:
Change #1: Request for equitable relief can be filed any time before the collection statute runs. Previously, the rule used to be that relief had to be requested within 2 years of the commencement of collection action.
Change #2: Threshold conditions previously required that the income tax liability must be attributable to the “guilty” spouse. New exception exists if the item stems from the “guilty” spouse’s fraud which gave rise to the understatements of tax (even if the income is attributable to the “innocent spouse.”
Change #3: Equitable relief now applies to both understatements of tax as well as underpayments.
Change #4: Streamlined determinations now also apply to claims for equitable relief under IRC § 66(c) (i.e. relief from community property laws).
Change #5: No one factor or majority of factors controls a determination – it all depends on the facts and circumstances. Previously, some factors were more important than others.
Change #6: Standards for economic hardship are revised. A lack of economic hardship will now be viewed as a neutral factor.
Change #7: A finding of actual knowledge of an item, giving rise to an understatement, will no longer be weighed more heavily than other factors. Abuse or financial control by “guilty” spouse causing fear of retaliation will result in the knowledge factor to weigh in favor of relief.
Change #8: Similar to change #7 above, in a situation where the “innocent” spouse had knowledge that “guilty” spouse would not pay liability within a reasonably prompt time frame – the existence of abuse or financial control causing a fear of retaliation – will cause this factor to weigh in favor of relief.
Change #9: IRS clarifies that the legal obligation of the “innocent” spouse is a consideration (not just whether the “guilty” spouse has an obligation).
Change #10: Refunds are now available in deficiency cases for payments made other than through an installment agreement
These changes, if the facts and law are argued effectively, can significantly increase the chances of getting tax relief.