Uncle Bill has four children…that he knows of. We met Jedediah in a previous post. Jethro is on year four of his five-year stint at Raiford for possession of amphetamines with intent to distribute. In his defense, Jethro agreed with the officer that the crank was his. However, he vehemently denied that he had any intent whatsoever to share it with anyone else. (Candidly, you absolutely believe him.) Bill and Ethel’s daughters Jennie and Jaime were far less prone to criminality than their delinquent male siblings.
Jennie lived a simple life in the country with her husband Jim Bob, three to four mutts (depending on the season, as the dogs came and went), and a strapping young lad of six, James Robert. Jim Bob and Jennie were itinerant before James Robert was born, which was made all the easier given the fact that their home was, itself, mobile. Once they had James Robert, they decided to settle down, which simply meant putting cinderblocks under the RV, hooking up to a sewer line, and erecting a comically large satellite dish on the roof of the vehicle-qua-home.
Jaime, or “Moon” as she had demanded to be called ever since she ran off to the wilds of Oregon in the mid-1990s with a patchouli-scented hippie named Carl in his orange VW microbus. Their plan was to live off the land, scraping together money when they needed it from odd jobs, which ranged from teaching yoga to goat milking for a local vegan soap company in Portland. However, Moon and Carl were enterprising hippies, and they took a chance in the late 90s, throwing all of their resources into hemp and beads and capitalizing on the hemp necklace fashion trend popular with Gen-X teenagers everywhere. (I am not too proud to say I made and wore one.)
Whether their exit from the fiber jewelry market precipitated the end of the craze, or whether it fizzled out on its own, you couldn’t say, but they got out just in time and reinvested their earnings in a small company based out of Seattle that was raising capital to sell books online. You never cared for Carl, his malodor, or his temperament, but you could put aside the fact that he smelled like free love warmed over, because Moon loved him, and you admired his business acumen. Still, there was something unsettling about him.
You were checking to see when the Red Sox would play (read: lose) again, when your phone rings, and it is a teary-eyed Moon on the other end of the receiver. She explains that she just opened a letter from the IRS, which said something about liens and levies and all sorts of other words she didn’t understand. After calming down, she explains that Carl confessed to her that he hadn’t, technically, paid taxes since 1997. He was going to, of course, but his campaign to legalize marijuana in Oregon consumed his time. (Carl was a something of a trailblazer (pun totally intended) in the legalization crusade.)
Moon explains that she had no idea that he had not filed taxes. He handled all of the finances with an iron fist, and aside from the generous allowance she received each month from her share of Amazon stock, she had no idea about their financial situation or wherewithal. She felt so betrayed by Carl that she moved out to a 10,000 foot “glorified yoga den” overlooking the Puget Sound, and she has no intention of returning to him.
You explain that there is a potential avenue through which she might not be held personally liable for Carl’s misdeeds. You explain that it is very fact intensive, and given the size of the liability, the IRS would scrutinize the application all the more carefully. She asks you to tell her more about this “innocent spouse” relief, and you are inclined to give her the Reader’s Digest version. But, like her father, Uncle Bill, she asks so many damn questions that you think to yourself, fine, you get the long version.
Eligibility for Innocent Spouse Relief under IRC § 6015(b) and IRC § 6015(c)
An individual who qualifies and elects under IRC § 6013 to file a joint Federal income tax return with another individual is jointly and severally liable for any Federal income tax liabilities for that year.[1] A spouse or former spouse may, however, be relieved of joint and several liability if he or she qualifies for innocent spouse relief (under IRC § 6015(b)(1) and (b)(2) and Treas. Reg. § 1.6015-2), allocation of a deficiency (under IRC § 6015(c) and Treas. Reg. § 1.6015-3), or equitable relief (under IRC § 6015(f) and Treas. Reg. § 1.6015-4).
Each of the potential avenues is extremely fact intensive, primarily objective (read: detached and coldhearted), and onerous to obtain for your client. Nevertheless, innocent spouse relief is often the only avenue available to extricate a spouse or former spouse from joint and several liability for the ne’er-do-well-non-requesting spouse’s tax foibles (or downright fraud). A requesting spouse may seek relief, at the same time, by submitting a claim under any or all of (a) the innocent spouse provisions, (b) the allocation of deficiency provisions, and/or the equitable relief provisions.[2] It is important to remember, however, that equitable relief will not be available if the taxpayer qualifies for innocent spouse relief or allocation of deficiency relief.[3]
Procedurally, a requesting spouse seeking equitable relief Pursuant to IRC § 6015 must file Form 8857 (Request for Innocent Spouse Relief), or other similar statement signed under penalties of perjury, within the applicable period of limitation, which we will discuss below.[4]
Rules Applicable to All Claims or Elections for Relief under IRC § 6015
Relief is not available for liabilities that are required to be reported on a joint Federal income tax return but are not income taxes imposed under Subtitle A of the Internal Revenue Code, such as domestic service employment taxes under IRC § 3510.[5] Similarly, a requesting spouse is not entitled to relief from joint and several liability for any year for which the requesting spouse has entered into a closing agreement or offer in compromise with the IRS that disposes of the same liability that is subject of the claim for relief, except in TEFRA partnership proceedings.[6]
If the IRS establishes that a spouse transferred assets to the other spouse as part of a fraudulent scheme, relief is not available under IRC § 6015.[7] For purposes of this section, a fraudulent scheme includes a scheme to defraud the IRS or another third party, including, but not limited to, creditors, ex-spouses, and business partners.[8] Further, the relief provisions of IRC §6015 do not negate liability that arises under the operation of other laws. As such, a requesting spouse who is relieved of joint and several liability may nevertheless remain liable for the unpaid tax (including additions to tax, penalties, and interest) to the extent provided by Federal or state transferee liability or property laws.[9]
Defining Actual or Constructive Knowledge
A requesting spouse has “knowledge or reason to know” of an understatement if he or she actually knew of the understatement, or if a reasonable person in similar circumstances would have known of the understatement.[10] If the IRS demonstrates that, at the time the return was signed, the requesting spouse had actual knowledge of an erroneous item that is allocable to the non-requesting spouse, the election to allocate the deficiency (attributable to that item is invalid), and the requesting spouse will remain liable for the portion of the deficiency attributable to that item.[11] The IRS has both the burden of production and the burden of persuasion.[12] Therefore, the IRS must establish, by a preponderance of the evidence, that the requesting spouse had actual knowledge of the erroneous item in order to invalidate the election.[13]
In the case of omitted income, knowledge of the item includes knowledge of the receipt of the income.[14] In the case of an erroneous deduction or credit, knowledge of the item means knowledge of the facts that made the item not allowable as a deduction or credit.[15] If a deduction is fictitious or inflated, the IRS must establish that the requesting spouse actually knew that the expenditure was not incurred, or not incurred to that extent.[16]
If a requesting spouse had actual knowledge of only a portion of an erroneous item, then relief is not available for that portion of the erroneous item.[17] Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge.[18] The portion of the deficiency for which a requesting spouse is liable is increased (up to the entire amount of the deficiency) by the value of any disqualified asset that was transferred to the requesting spouse.[19]
For understatement cases, whether the requesting spouse knew or had reason to know of the item giving rise to the understatement or deficiency as of the date the joint return (including a joint amended return) was filed, or the date the requesting spouse reasonably believed the joint return was filed.[20] If the requesting spouse did not know and had no reason to know of the item giving rise to the understatement, this factor will weigh in favor of relief.[21] If the requesting spouse knew or had reason to know of the item giving rise to the understatement, this factor will weigh against relief. Actual knowledge of the item giving rise to the understatement or deficiency will not be weighed more heavily than any other factor.[22]
For underpayment cases, if the income tax liability was properly reported but not paid, whether, as of the date the return was filed or the date the requesting spouse reasonably believed the return was filed, the requesting spouse knew or had reason to know that the non-requesting spouse would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of the return.[23] This factor will weigh in favor of relief if the requesting spouse reasonably expected the non-requesting spouse to pay the tax liability reported on the return.[24]
Factors Considered by IRS when Considering Equitable Relief
The facts and circumstances that are considered by the IRS in determining whether the spouse had “reason to know” of the understatement include, but are not limited to, the nature of the erroneous item and the amount of the erroneous item relative to other items; the couple’s financial situation; the requesting spouse’s educational background and business experience; the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item; whether the requesting spouse failed to inquire, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question; and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (e.g., omitted income from an investment regularly reported on prior years’ returns).[25]
Rev. Proc. 2013-34, which provides taxpayers guidance beyond the Code and Treasury Regulations, lists additional factors affecting the IRS’s decision to allow a claim for equitable innocent spouse relief. The IRS considers whether the requesting spouse is no longer married to the non-requesting spouse as of the date the Service makes its determination. If the requesting spouse is still married to the non-requesting spouse, this factor is neutral. If the requesting spouse is no longer married to the non-requesting spouse, this factor will weigh in favor of relief.
Next, the IRS considers whether the requesting spouse will suffer economic hardship if relief is not granted. If satisfaction of the tax liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses, an economic hardship exists. If denying relief from the joint and several liability will cause the requesting spouse to suffer economic hardship, this factor will weigh in favor of relief. If denying relief from the joint and several liability will not cause the requesting spouse to suffer economic hardship, this factor will be neutral.
The IRS considers whether the requesting spouse or the non-requesting spouse has a legal obligation to pay the outstanding Federal income tax liability, such as one arising from a divorce decree or other legally binding agreement. This factor will weigh in favor of relief if the non-requesting spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. This factor, however, will be neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the non-requesting spouse would not pay the income tax liability. This factor will weigh against relief if the requesting spouse has the sole legal obligation.
The IRS considers whether the requesting spouse significantly benefited from the unpaid income tax liability or understatement.[26] A significant benefit is any benefit in excess of normal support. If only the non-requesting spouse significantly benefited from the unpaid tax or understatement, and the requesting spouse had little or no benefit, or the non-requesting spouse enjoyed the benefit to the requesting spouse’s detriment, this factor will weigh in favor of relief. If the amount of unpaid tax or understatement was small such that neither spouse received a significant benefit, then this factor is neutral. The IRS also considers whether the requesting spouse has made a good faith effort to comply with the income tax laws in the taxable years following the taxable year or years to which the request for relief relates.
Finally, the IRS considers whether the requesting spouse was in poor physical or mental health. This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health at the time the return or returns for which the request for relief relates were filed (or at the time the requesting spouse reasonably believed the return or returns were filed), or at the time the requesting spouse requested relief.
With respect to “actual knowledge,” one factor that may be relied upon in demonstrating that a requesting spouse had actual knowledge of an erroneous item is whether the requesting spouse made a deliberate effort to avoid learning about the item in order to be shielded from liability.[27] Another factor that may be relied upon in demonstrating that a requesting spouse had actual knowledge of an erroneous item is whether the requesting spouse and the non-requesting spouse jointly owned the property that resulted in the erroneous item.[28]
If the requesting spouse establishes that he or she was the victim of domestic abuse prior to the time the return was signed, and that, as a result of the prior abuse, the requesting spouse did not challenge the treatment of any items on the return for fear of the non-requesting spouse’s retaliation, the limitation on actual knowledge will not apply.[29] However, if the requesting spouse involuntarily executed the return, the requesting spouse may choose to establish that the return was signed under duress.[30] The IRS may also take into account the fact that the requesting spouse has been deserted by the non-requesting spouse.[31]
IRC § 6015(b)(1) – Innocent Spouse Relief: Actual or Constructive Knowledge of Understatement Disqualifying
The first type of relief, pursuant to IRC § 6015(b)(1), requires that the requesting spouse satisfy five objective criteria to qualify: (1) a joint return has been made for the taxable year(s) in question; (2) on such return there is an understatement of tax attributable to the erroneous items of the non-requesting spouse; (3) the other individual filing the joint return (i.e., the requesting spouse) establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement; (4) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and (5) the requesting spouse invokes the benefits of IRC § 6015(b)(1) no later than two years after the IRS begins collection activities.[32] If the requesting spouse meets these five threshold criteria, then the requesting spouse will be relieved of liability for tax (including interest, penalties, and other amounts) for the taxable year(s) at issue, to the extent such liability is attributable to the understatement on the joint return.
IRC § 6015(b)(2) – Innocent Spouse Relief: Apportionment of Liability
If the requesting spouse meets all of the criteria under IRC § 6015(b)(1), except for paragraph (c) (actual or constructive knowledge), and he or she establishes that in signing the return that he or she did not know, and had no reason to know, the extent of such understatement, then the requesting spouse will (not may) be relieved of liability for tax (including interest, penalties, and other amounts) for the taxable year(s) at issue, to the extent that such liability is attributable to the portion of the understatement of which such individual did not know and had no reason to know.[33] This form of relief is referred to as “apportionment” of liability.
IRC § 6015(c) – Innocent Spouse Relief for Separated/Divorced Spouses: Only Actual Knowledge Disqualifying
The third type of innocent spouse relief concerns divorced, legally separated, widowed, or otherwise non-cohabitating spouses.[34] If a requesting spouse, who is made a joint return for the taxable year(s) in question, elects to seek relief under IRC § 6015(c), the requesting spouse’s liability for any deficiency which is assessed will (not may) not exceed the portion of the deficiency properly allocable to the requesting spouse under IRC § 6015(d).[35] An election under IRC § 6015(c) for any taxable year(s) may be made at any time after a deficiency for such year is asserted but no later than 2 years after the date on which the IRS has begun collection activities with respect to the individual making the election.[36]
Relief under IRC § 6015(c) is limited to former spouses (i.e., divorced or widowed spouses), spouses that are legally separated, or spouses who are no longer living together (and have not been living together for one year prior to the requesting spouse filing for innocent spouse relief).[37] Except for establishing actual knowledge, the burden of which is on the IRS, the requesting spouse must prove that all of the qualifications for making an election under IRC § 6015(c) have been satisfied and that none of the limitations (such as the limitation relating to transfers of disqualified assets) apply.[38] The requesting spouse must also establish the proper allocation of the erroneous items.[39]
IRC § 6015(c)(4) – Liability Increased on Account of Transfers of Property to Avoid Tax
If the IRS demonstrates that assets were transferred between spouses filing a joint return as part of a fraudulent scheme by such spouses, an election under IRC § 6015(c) by either individual will be invalid. Further, if the IRS demonstrates that, at the time the requesting spouse sign the return, the requesting spouse had actual knowledge of any item giving rise to the deficiency (or portion thereof), which item is not allocable to the requesting spouse under IRC § 6015(d), then the requesting spouse with actual knowledge is ineligible for the IRC § 6015(c) election – meaning that the requesting spouse must proceed under IRC §6015(f), if eligible thereunder. It is important to recognize that under IRC § 6015(c), whether the taxpayer “should have known” about the understatement (i.e., constructive knowledge) does not come into play, unlike IRC § 6015(b).
Finally, notwithstanding any other provision of IRC § 6015(c), any portion of the deficiency for which the requesting spouse is liable will be increased by the value of any disqualified asset transferred to the individual.[40] Stated another way, if the requesting spouse receives property that is transferred for the principal purpose of avoiding tax or payment of tax (the definition of a “disqualified asset”), the requesting spouse will be liable for the portion of the deficiency for which he or she would ordinarily be liable, increased by the value of such disqualified asset transferred to the requesting spouse by the ne’er-do-well, non-requesting spouse.[41]
The burden rests on the requesting spouse to overcome the presumption that any transfer made within one year before the first notice of deficiency is issued to the taxpayer has, as its principal purpose, the avoidance or payment of tax.[42] There is one proviso to this presumption. A transfer made pursuant to a decree of divorce or separate maintenance agreement or a written instrument incident to divorce or separation agreement will not be presumed to be the transfer of a disqualified asset.[43]
IRC § 6015(d) – Allocation of Deficiency
So, how do we determine what portion of the deficiency in a joint return is allocated to the requesting spouse? IRC § 6015(d)(1) explains that the “innocent spouse’s” portion of the deficiency is calculated by taking the total net amount of items taken into account in computing the deficiency and dividing this by those items allocable to the non-requesting spouse.[44] There are additional allocation methods, to be used in special situations, such as when a deficiency arises from two or more erroneous items that are subject to tax at different rates (e.g., ordinary income and capital gain items), or other such methods set forth in additional IRS publications.[45]
If a deficiency (or portion thereof) is attributable to either (a) the disallowance of a credit; or (b) any tax (other than income or alternative minimum tax), which tax is required to be included with the joint return, and is allocated to the non-requesting spouse, that item will not be taken into account under the calculation in IRC § 6015(d)(1).[46]
Any item giving rise to a deficiency on a joint return will be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.[47] However, an item that would be otherwise allocable to one spouse will be allocated to the other spouse filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual.[48] If the IRS establishes that another method of allocation is appropriate due to the fraud of one or both of the spouses, the IRS may use such method of allocation even though it is not prescribed by IRC § 6015(d)(3)(A).[49]
Even though under IRC § 6015(d)(3)(A), the spouses are treated as filing separate returns, if an item of deduction or credit is disallowed it in its entirety only because a separate return has been filed, that disallowance will be disregarded and the item of deduction or credit will be computed as if a joint return had been filed and then allocated between the spouses appropriately.[50] Finally, if the liability of a child of one spouse or both spouses is included on a joint return, that liability will be disregarded in computing the separate liability of either spouse, and such liability will be allocated appropriately between the spouses.[51]
IRC § 6015(f) – Equitable Innocent Spouse Relief
If, taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for any unpaid tax or any deficiency (or any portion of either), and relief is not available to the requesting spouse under IRC § 6015(b) or IRC § 6015(c), then the IRS may relieve the requesting spouse of such liability.[52] The requesting spouse may request equitable relief under IRC § 6015(f) so long as one of two conditions are met: (a) if the liability has not been paid, the request must be made before the expiration of the applicable period of limitation under IRC § 6502 (Collection After Assessment); or (b) if the liability has been paid, the request must be made during the period in which the individual could timely submit a claim for refund or credit of such payment under IRC § 6511(a) (Period of Limitation on Filing Claim for Refund or Credit).[53]
The Internal Revenue Service will not consider premature claims for IRC § 6015 relief. A premature claim is a claim for relief that is filed for a tax year prior to the receipt of a notification of an audit or a letter or notice from the IRS indicating that there may be an outstanding liability with regard to that year. Such notices or letters do not include notices issued pursuant to IRC § 6223 relating to TEFRA partnership proceedings. A premature claim is not considered an election or request under Treas. Reg. § 1.6015-1(h)(5). A requesting spouse is entitled to only one final administrative determination of relief under Treas. Reg. § 1.6015-1 for a given assessment, unless the requesting spouse properly submits a second request for relief that is described in Treas. Reg. § 1.6015-1(h)(5).[54]
There are seven threshold conditions for equitable relief under IRC § 6015(f) as set forth in Rev. Proc. 2013-14. The requesting spouse must have filed a joint return for the taxable year for which he or she seeks relief, and relief cannot be available to the requesting spouse under IRC § 6015(b) or (c). The claim for relief must be timely filed. This means that if the requesting spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made on or before statute of limitations for collection runs, as provided in IRS § 6502. Generally, that period expires 10 years after the assessment of tax, but it may be extended by other provisions of the Code. With respect to claims for refund or credit, such claims must be made before the expiration of the period of limitation on credit or refund.[55] Generally, this period expires three years from the time the return was filed or two years from the time the tax was paid, whichever is later.
No assets whatsoever can be transferred between the spouses as part of a fraudulent scheme by the spouses, and the requesting spouse cannot knowingly participate in the filing of a fraudulent joint return. Furthermore, the non-requesting spouse may not have transferred disqualified assets to the requesting spouse.[56] If the non-requesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets.
Notwithstanding the foregoing, even if there was a transfer of disqualified assets, the requesting spouse may be eligible for relief if the non-requesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information, or the requesting spouse did not have actual knowledge that disqualified assets were transferred. Finally, the income tax liability from which the requesting spouse seeks relief must be attributable (either in full or in part) to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse’s income. If the liability is partially attributable to the requesting spouse, then relief can only be considered for the portion of the liability attributable to the non-requesting spouse. Nonetheless, the IRS will consider granting relief regardless of whether the understatement, deficiency, or underpayment is attributable (in full or in part) to the requesting spouse if any one of five exceptions applies.
First, if an item is attributable or partially attributable to the requesting spouse solely due to the operation of community property law, then that item (or portion thereof) will be considered to be attributable to the non-requesting spouse.
Second, if the item is titled in the name of the requesting spouse, the item is presumptively attributable to the requesting spouse, although this presumption is rebuttable.
Third, If the requesting spouse did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by the non-requesting spouse for the non-requesting spouse’s benefit, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to an item of the requesting spouse. The IRS will consider granting relief in this case only to the extent that the funds intended for the payment of tax were taken by the non-requesting spouse.
Fourth, the IRS will consider granting relief notwithstanding that the item giving rise to the understatement or deficiency is attributable to the requesting spouse, if the requesting spouse establishes that the non-requesting spouse’s fraud is the reason for the erroneous item.
Fifth, and most importantly, if the requesting spouse establishes that he or she was the victim of abuse prior to the time the return was filed, and that, as a result of the prior abuse, the requesting spouse was not able to challenge the treatment of any items on the return, or was not able to question the payment of any balance due reported on the return, for fear of the non-requesting spouse’s retaliation, the IRS will consider granting equitable relief even though the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse.
Streamlined Determinations Granting Equitable Relief under IRC § 6015(f)
The IRS will make “streamlined determinations” granting equitable relief under IRC § 6015(f), in cases in which the requesting spouse establishes that the requesting spouse (a) is no longer married to the non-requesting spouse; (b) would suffer economic hardship if relief were not granted; and (c) lacked actual knowledge and had no reason to know that there was an understatement or deficiency on the joint income tax return or did not know or have reason to know that the non-requesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return.[57]
If the non-requesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return, or to question the payment of the taxes reported as due on the joint return or challenge the non-requesting spouse’s assurance regarding payment of the taxes, for fear of the non-requesting spouse’s retaliation, then the abuse or financial control will result in the “knowledge” factor being satisfied even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or that the non-requesting spouse would not pay the tax liability.[58]
IRC § 6015(e) – Petition for Review of Innocent Spouse Relief
A requesting spouse seeking relief from liability, asserted in a notice of deficiency, pursuant to IRC § 6015(b), IRC § 6015(c), or IRC § 6015(f) may petition the Tax Court to determine the appropriate relief available, so long as the petition is filed at any time after the earlier of (a) the IRS mailing notice of the IRS’s final determination of relief available to the individual, or (b) the date which is six months after the date that the innocent spouse relief request is made with the IRS.[59] However, the innocent spouse petition may not be filed more than nine months after the date innocent spouse relief is sought from the IRS.[60]
The IRS may not levy a requesting spouse’s assets, nor may the IRS bring or prosecute a proceeding in court against the requesting spouse,[61] until nine months after the innocent spouse relief election or request (pursuant to IRC § 6015(b) or (c)) is submitted to the IRS, or, if a petition has been filed with the Tax Court, until that decision has become final.[62] Critically, however, If a requesting spouse seeks only equitable relief under IRC § 6015(f),[63] the restrictions on collection do not apply. Accordingly, the request for equitable relief does not suspend the running of the period of limitations on collection.[64]
Any court (including the Tax Court, if a timely innocent spouse petition has been filed) may enjoin such levy or proceeding during the time the “prohibition” is in force.[65] A requesting spouse may, of course, waive such limitations on collection.[66] If the requesting spouse is prohibited from filing a petition under Title 11 (the Bankruptcy Code) with respect to a final determination, the running of the period to file the petition will be suspended during the pendency of the bankruptcy (i.e., so long as the taxpayer/debtor is prohibited from filing a petition) and for 60 days thereafter.[67]
If a suit for refund is begun by either the requesting or non-requesting spouse pursuant to IRC § 6532 (refund suits), the Tax Court will lose its jurisdiction over the requesting spouse’s action to the extent that jurisdiction is acquired by the district court or the Court of Federal Claims over the years that are subject to the suit for refund, and the Federal court that acquires the jurisdiction under the refund suit will have jurisdiction over the innocent spouse petition.[68]
Even though an actual refund suit divests the Tax Court of jurisdiction to hear a petition for innocent spouse relief, credits and refunds are available under IRC § 6015.[69] That is to say, if a requesting spouse pays the tax liability, and later seeks relief from the IRS under IRC § 6015, the IRS may issue a refund or credit to the taxpayer (notwithstanding the general refund claim procedures of IRC § 6511 and IRC § 6523).[70] If the qualification of the requesting spouse for innocent spouse relief was decided in the same taxable year, that decision will be conclusive with respect to the qualification for innocent spouse relief before the IRS (request for relief) or the Tax Court (petition for relief).[71] Critically, however, no credit or refund will be allowed if the innocent spouse proceeds under IRC § 6015(c).[72]
Non-Requesting Spouse’s Notice and Opportunity to Participate in Administrative Proceedings
When the IRS receives an election under IRC § 6015(b) or (c) or a request for relief under IRC § 6015(f), the IRS must send a notice to the non-requesting spouse’s last known address that informs the non-requesting spouse of the requesting spouse’s claim for relief.[73] The notice must provide the non-requesting spouse with an opportunity to submit any information that should be considered in determining whether the requesting spouse should be granted relief from joint and several liability.[74]
A non-requesting spouse is not required to submit information under this section; however, upon the request of either spouse, the IRS will share with one spouse the information submitted by the other spouse, unless such information would impair tax administration.[75] The Internal Revenue Service must notify the non-requesting spouse of the Service’s preliminary and final determinations with respect to the requesting spouse’s claim for relief under IRC § 6015.[76]
The failure of the non-requesting spouse to submit information does not affect the non-requesting spouse’s ability to later seek relief from joint and several liability for the same tax year.[77] However, information that the non-requesting spouse submits of this section is relevant in determining whether relief from joint and several liability is appropriate for the non-requesting spouse should the non-requesting spouse also submit an application for relief.[78]
Footnotes:
[1] See Treas. Reg. § 1.6015-1(a)(1).
[2] Treas. Reg. § 1.6015-1(a)(2).
[3] Id.; see also IRC § 6015(f)(1)(A)-(B).
[4] Treas. Reg. § 1.6015-5(a).
[5] Treas. Reg. § 1.6015-1(a)(3).
[6] Treas. Reg. § 1.6015-1(c).
[7] Treas. Reg. § 1.6015-1(d).
[9] Treas. Reg. § 1.6015-1(j).
[10] Treas. Reg. § 1.6015-2(c).
[11] Treas. Reg. § 1.6015-3(c)(2)(i).
[14] Treas. Reg. § 1.6015-3(c)(2)(i)(A).
[15] Treas. Reg. § 1.6015-3(c)(2)(i)(B)(1).
[16] Treas. Reg. § 1.6015-3(c)(2)(i)(B)(2).
[17] Treas. Reg. § 1.6015-3(c)(2)(ii).
[18] Treas. Reg. § 1.6015-3(c)(2)(iii).
[19] Treasury Reg. § 1.6015-3(c)(3)(i).
[20] Rev. Proc. 2013-34.
[21] Id.
[22] Id.
[23] Rev. Proc. 2013-34.
[24] Id.
[25] Treas. Reg. § 1.6015-2(c).
[26] See Treas. Reg. § 1.6015-2(d).
[27] Treas. Reg. § 1.6015-3(c)(2)(iv).
[29] Treas. Reg. § 1.6015-3(c)(2)(v).
[30] Id.; see also Treas. Reg. § 1.6015-4(d).
[32] See also Treas. Reg. § 1.6015-2(a); Treas. Reg. § 1.6015-5(b)(2)(i) (defining “collection activities”).
[35] See also, Treas. Reg. § 1.6015-3(d)(1).
[37] IRC § 6015(c)(3)(A)(i)(I)-(II).
[38] Treas. Reg. § 1.6015-3(d)(3).
[42] IRC § 6015(c)(4)(B)(ii)(I).
[43] IRC § 6015(c)(4)(B)(ii)(II).
[44] Treas. Reg. § 1.6015-3(d)(4).
[45] Treas. Reg. § 1.6015-3(d)(6); see also, Rev. Proc. 2013-34.
[53] Treas. Reg. § 1.6015-5(b)(1).
[54] Treas. Reg. § 1.6015-5(c)(1). The requirements under Treas. Reg. § 1.6015-1(h)(5) for another bite of the apple are that (a) the requesting spouse did not qualify for relief under Treas. Reg. § 1.6015-3 when the Internal Revenue Service considered the first election solely because the qualifications of Treas. Reg. § 1.6015-3(a) were not satisfied (i.e., the requesting spouse was still married and cohabitating with the non-requesting spouse); and (b) at the time of the second election, the qualifications for relief under Treas. Reg. § 1.6015-3(a) are satisfied.
[55] As provided in IRC § 6511.
[57] See Rev. Proc. 2013-34, § 4.02.
[58] Id.
[59] IRC § 6015(e)(1)(A); Treas. Reg. § 1.6015-7(a), (b).
[60] IRC § 6015(e)(1)(A)(ii) (technically, the deadline is the 90th day after the six-month period subsequent to the request having been sent to the IRS).
[61] Proceeding under IRC § 6015(b), IRC § 6015(c), or IRC § 6015(f).
[62] IRC § 6015(e)(1)(B)(i); Treas. Reg. § 1.6015-7(c).
[63] As governed by Treas. Reg. § 1.6015-4.
[64] Treas. Reg. § 1.6015-7(c).
[66] IRC § 6015(e)(5); Treas. Reg. § 1.6015-7(c)(2).
[68] IRC § 6015(e)(3)(i)-(ii).
[69] See IRC § 6015(g).
[72] See Treas. Reg. § 1.6015-3(c)(1).
[73] Treas. Reg. § 1.6015-6(a)(1).
[76] Treas. Reg. § 1.6015-6(a)(2).
[77] Treas. Reg. § 1.6015-6(c).
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