Innocent Spouse Relief may get faster....or maybe not
IRS provides updated guidance for equitable innocent spouse relief requests
Rev Proc 2013-34, 2013-42 IRBIn a Revenue Procedure, IRS has provided guidance to taxpayers seeking equitable innocent spouse relief under Code Sec. 66(c) or Code Sec. 6015(f), including the threshold requirements for any relief request, the conditions under which IRS will make certain streamlined relief determinations, and a nonexclusive list of factors for considering whether relief should be granted under either provision.
Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return under Code Sec. 6013(d). However, Code Sec. 6015 provides relief from such liability under certain circumstances. Code Sec. 6015(f)allows relief to a requesting spouse if, among other conditions, taking into account all the facts and circumstances, it is inequitable to hold the individual liable.
Code Sec. 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. It includes an equitable relief provision similar to Code Sec. 6015(f).
Code Sec. 6015(b) (innocent spouse relief) and Code Sec. 6015(c) (separate liability relief) only provide relief from an understatement or deficiency, and not from an underpayment of tax reported on a joint return. However, Code Sec. 66(c) and Code Sec. 6015(f) permit equitable relief from an underpayment of tax or from a deficiency; these rules are intended for situations where the requesting spouse didn't know, and had no reason to know, that funds intended to pay taxes were instead taken by the other spouse for his or her own benefit. Among the factors considered in whether to grant relief are the requesting spouse's knowledge of the item giving rise to the deficiency and that the tax wouldn't be paid, whether the requesting spouse would suffer economic hardship if denied relief, whether the requesting spouse received a significant benefit regarding the unpaid liabilities, whether the nonrequesting spouse had a legal obligation to pay the tax, whether the requesting spouse was abused, and the extent of the requesting spouse's subsequent compliance with all Federal income tax laws.
Timing restrictions. To be eligible for relief under Code Sec. 6015(b) or Code Sec. 6015(c), the Code explicitly provides that the requesting spouse must elect relief not later than the date that is two years after the date that IRS has begun collection activities with respect to the individual making the election. (Code Sec. 6015(b)(1)(E), Code Sec. 6015(c)(3)(B)) Despite the fact that no such limitation is imposed in Code Sec. 6015(f), IRS previously took the position that a spouse requesting equitable relief had to do so by filing Form 8857 or a similar statement with IRS no later than two years from the date of the first collection activity against the requesting spouse for the joint tax liability. IRS scrapped this rule in the summer of 2011 when it issued Notice 2011-70, 2011-32 IRB 135; that notice stated that to be considered for equitable relief, a request must be filed with IRS within the period of limitation for collection of tax in Code Sec. 6502 or, for any credit or refund of tax, within the period of limitation in Code Sec. 6511. (See Weekly Alert ¶ 4 07/28/2011) It then issued proposed regs to reflect these changes. (See Weekly Alert ¶ 17 08/15/2013)
Proposed revenue procedure. Early in 2012, IRS released Notice 2012-8, 2012-4 IRB 309, which provided a proposed Revenue Procedure to update and revise Rev Proc 2003-61, 2003-2 CB 296, modify and clarify the criteria for equitable relief, and eliminate the two-year rule for filing a claim for relief under Notice 2011-70. (See Weekly Alert ¶ 28 01/12/2012) After considering the comments received in response and making certain modifications, IRS has issued Rev Proc 2013-34.
Significant changes to Rev Proc 2003-61. Rev Proc 2013-34 generally follows the structure and format of Rev Proc 2003-61, but with a number of significant changes, including the following:
- New timeframe adopted. Rev Proc 2013-34 adopts the revised filing timeframe discussed above.
- Presence of abuse. In general, Rev Proc 2013-34 gives greater deference to the presence of abuse, in recognition of the fact that the issue of abuse can be relevant with respect to the analysis of other factors and can negate the presence of certain factors.
- Economic hardship factor. The “economic hardship” factor now includes minimum standards for determining if the requesting spouse would suffer economic hardship absent relief, and that a lack of economic hardship no longer weighs against relief.
- Knowledge factor. The “knowledge factor” was also changed for understatement cases such that actual knowledge of the item giving rise to an understatement or deficiency will no longer be weighed more heavily than other factors. Further, the knowledge factor can weigh in favor of relief even if the requesting spouse knew of the item(s) in cases of abuse or financial control exercised by the nonrequesting spouse, and in considering whether the requesting spouse knew that the reported tax wouldn't be paid, IRS will consider whether there was an expectation of payment within a reasonable period of time after filing (as opposed to just at the time of filing).
- Legal obligation factor. Rev Proc 2013-34 clarifies that in addition to considering whether the nonrequesting spouse has a legal obligation to pay the taxes, the requesting spouse's obligation should also be considered.
- Significant benefit factor. Any significant benefit a requesting spouse may have received from the unpaid tax or understatement will not weigh against relief (i.e., will be neutral) if the nonrequesting spouse abused the requesting spouse or maintained financial control and made the decisions regarding living a more lavish lifestyle. If only the nonrequesting spouse significantly benefitted from the unpaid tax or understatement, and the requesting spouse had little or no benefit or the nonrequesting spouse enjoyed the benefit to the requesting spouse's detriment, this factor will weigh in favor of relief. Further, if the amount of unpaid tax or understatement of tax was small such that neither spouse received a significant benefit (determined under the circumstances of each case), then this factor is neutral.
- Compliance with tax laws. A requesting spouse's subsequent compliance with all Federal income tax laws is a factor that may now weigh in favor of relief, instead of always being neutral. (Rev Proc 2013-34, Sec. 3)
- The requesting spouse filed a joint return for the taxable year for which he or she seeks relief.
- Relief is not available to the requesting spouse under Code Sec. 6015(b) or Code Sec. 6015(c).
- The claim for relief is timely filed (see above).
- No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.
- The nonrequesting spouse did not transfer disqualified assets (under Code Sec. 6015(c)(4)(B)) to the requesting spouse.
- The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.
- The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. If the liability is partially attributable to the requesting spouse, then relief can only be considered for the portion attributable to the nonrequesting spouse. However, 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 an exception (such as abuse) applies. (Rev Proc 2013-34, Sec. 4.01)
If a requesting spouse is not entitled to a streamlined determination, he or she is still entitled to be considered for relief under the equitable factors below.
Equitable relief factors. IRS expressly states that the factors listed are not intended to comprise an exclusive list, and that no one factor (or majority of factors) necessarily determines the outcome.
Factors to be considered include marital status (as defined), economic hardship if relief isn't granted (referencing the Federal poverty guidelines), knowledge or reason to know of the item giving rise to the understatement or that the tax wouldn't be paid at the time of or within a reasonable period after filing, abuse by the nonrequesting spouse, whether either spouse had a legal obligation to pay the liability, whether the requesting spouse significantly benefitted (see Significant changes, above), whether the requesting spouse has made a good faith effort to comply with tax laws in the following years, and whether the requesting spouse was in poor mental or physical health. (Rev Proc 2013-34, Sec. 4.03)
Refunds. In both understatement and underpayment cases, a requesting spouse is eligible for a refund of separate payments made by him or her after July 22, '98, subject to Code Sec. 6511's limitations, if the requesting spouse establishes that the funds used to make the payment for which a refund is sought were provided by the requesting spouse. A requesting spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that the nonrequesting spouse made, but may be eligible for a refund of the requesting spouse's portion of a joint overpayment from another tax year that was applied to the joint income tax liability to the extent that the requesting spouse can establish that he or she provided the funds for the overpayment. (Rev Proc 2013-34, Sec. 4.04)
Effective date. Rev Proc 2013-34 is effective for relief requests filed on or after Sept. 16, 2013, and for requests for equitable relief pending on that date (with IRS, Appeals, or in court). (Rev Proc 2013-34, Sec. 7)