Editor: Valrie Chambers, Ph.D., CPA
Sec. 6015 provides three possible options for taxpayer relief from a joint tax liability. General relief under Sec. 6015(b) applies to taxpayers who can prove that in signing the joint return they did not know and did not have any reason to know about any understatement of tax. Separate liability relief under Sec. 6015(c) provides for limited relief from joint liability if the taxpayer is no longer married to, is legally separated from, or is not living with the spouse. Sec. 6015(f) provides for equitable relief in cases where the taxpayer does not qualify under subsection (b) or (c) and it would be inequitable to hold the taxpayer liable.
Innocent spouse cases should not be confused with injured spouse situations. An injured spouse is a taxpayer whose share of a joint refund has been applied to pay the other spouse’s obligations. The new procedures discussed below do not apply to injured spouses.
The IRS has a large backlog of cases requesting relief under the innocent spouse rules. In Rev. Proc. 2013-34, which was issued in September, the procedures for obtaining equitable relief from a joint tax liability under Secs. 6015(f) and 66(c) were modified. The revenue procedure applies to requesting spouses who do not qualify for relief under other Sec. 6015 subsections. To request relief under any part of Sec. 6015, a taxpayer must timely file a Form 8857, Request for Innocent Spouse Relief, with the IRS.
Joint and several tax liability for taxpayers for a particular tax year is created when married taxpayers file a joint return (or, by operation of law, in community property states). If the IRS determines that a spouse signed the joint return under duress, the election to file jointly is invalid and the innocent spouse has not filed a valid joint return. These new procedures do not apply to this type of situation because Sec. 6015 does not apply if the taxpayers have not filed a valid joint return. However, under this procedure and in accordance with Sec. 66(c), residents of community property states may apply for relief of tax liability on their share of community income no matter what type of return they file.
Rev. Proc. 2013-34
Rev. Proc. 2013-34 applies to new equitable relief claims submitted on or after Sept. 16, 2013, and claims in process as of that date. Streamlined relief will be granted if the applicant is no longer married to the requesting spouse, would suffer economic hardship, and did not know or have reason to know that there was an understatement or deficiency, or that payment of tax would not or could not be made. The revenue procedure also applies to applicants who do not qualify for streamlined relief but meet the other qualifications for obtaining equitable relief.
Significant changes in this revenue procedure include the weight given to the factors for determining whether it is inequitable not to grant relief, the filing deadline for relief, and a new exception as to the source of the income generating the liability. In addition, streamlined determinations under the revenue procedure apply to cases of understatement of tax liability, as well as cases of underpayment of tax.
Under Rev. Proc. 2013-34, the general conditions that must be met for relief are:
- The requesting spouse filed a joint return for the tax year for which he or she seeks relief;
- Relief is not available to the requesting spouse under Sec. 6015(b) or (c);
- The claim for relief is timely filed;
- No assets were transferred between the spouses as part of a fraudulent scheme by the spouses;
- The nonrequesting spouse did not transfer disqualified assets to the requesting spouse;
- The requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and
- 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.
As noted above, the IRS will make a streamlined determination of equitable relief if the taxpayer meets a limited number of specified conditions. If the requesting spouse meets the general conditions for relief but does not meet the conditions for streamlined relief, the IRS can also grant equitable relief based on all the facts and circumstances.
Factors for Equitable Relief
Rev. Proc. 2013-34 sets out seven factors the IRS will consider in making an equitable relief determination. These factors are marital status, economic hardship, knowledge or reason to know, legal obligation, significant benefit, good-faith effort to comply with income tax laws, and mental or physical health. However, this list is not exclusive, and the IRS will also consider any other relevant factor in making its determination. The revenue procedure clarifies that no one of these factors or even a majority of factors control the determination. The presence of spousal abuse is now given greater weight in this analysis than it was previously, and, while economic hardship continues to be a factor weighing in favor of relief, the lack of economic hardship will now be only a neutral factor in the determination.
If the requesting spouse is still married to the nonrequesting spouse, the marital status factor will be neutral. If they are divorced or separated, this factor will weigh in favor of the requesting spouse. Widows or widowers will not have this factor weighed against them to the extent they are not heirs to the nonrequesting spouse’s estate that would have sufficient assets to pay the tax liability.
In the past, actual knowledge of the item creating an understatement of tax liability was given more weight than other factors. This factor will no longer be weighed more heavily against granting relief. One factor the IRS will consider is whether the spouse requesting relief had a reasonable expectation, at the time the return was filed, that the liability would be paid within a reasonable amount of time. Filing an application for an installment agreement within 90 days after the due date or, if later, the date the return is filed will support a presumption that this was a reasonable expectation. If the requesting spouse has a legal obligation to pay the tax under an agreement incident to divorce or separation, this factor will be considered.
If the requesting spouse has complied with all federal income tax laws in subsequent periods, this factor will weigh in favor of relief. This is true if the requesting spouse is divorced from the nonrequesting spouse or is still married to the nonrequesting spouse but files separate returns. If the requesting spouse is still married and files compliant joint returns with the nonrequesting spouse, the factor will be considered neutral.
A spouse’s receiving significant financial benefit will also be considered. If, for example, the requesting spouse has enjoyed the benefit of a lavish lifestyle, generally this factor will weigh against relief. If, however, the nonrequesting spouse controlled the household and business finances or there was abuse such that the nonrequesting spouse made the decision on spending funds for a lavish lifestyle, then this mitigates this factor so that it is neutral. If the benefit the requesting spouse received is small under the facts and circumstances, this will be a neutral factor.
Statute of Limitation
Previously, a claim for equitable relief had to be filed within two years after the date of the first collection activity. Consistent with Notice 2011-70 and the proposed regulations in REG-132251-11, the new procedure provides that a request for equitable relief of liability must be filed before the expiration of the collection period (which under Sec. 6502 is generally 10 years after the assessment) or, in the case of a request for credit or refund, within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later (Sec. 6511).
If the item creating the tax liability is actually attributable to the requesting spouse, unlike under previous rules, the IRS can now consider granting relief if the applicant establishes that fraud committed by the nonrequesting spouse caused the understatement or deficiency.
Rev. Proc. 2013-34 states that:
The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse “does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse’s benefit.”
Many taxpayers will find faster relief under the new streamlined provisions of this revenue procedure, and many more will benefit from the flexibility granted to IRS personnel in weighing the factors that determine equitable treatment. Victims of spousal abuse now have clear guidelines to assist them in obtaining relief without having to go to Tax Court. The revenue procedure includes detailed examples and definitions that will be helpful in considering whether a taxpayer qualifies for, and in obtaining, equitable relief.
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Janet Hagy is president of Hagy & Associates PC in Austin, Texas. Ms. Hagy is a member of the AICPA IRS Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at email@example.com..