Adequate Notice of Innocent Spouse Rights

The Tax Court recently held that the two-year statute of limitations (SOL) on requesting innocent spouse relief did not apply when the IRS failed to provide the spouse with adequate notice of the right to claim such relief.

Facts

P and her former spouse filed a joint Federal income tax return. However, a portion of the tax liability went unpaid, because P’s former spouse made no estimated tax payments on his business income. The IRS withheld a refund P claimed on a subsequent individual return to partially offset the previous unpaid joint liability (the offset). In May 1999 and August 2001, the IRS sent P a letter notifying her of the offset, but neither of the notices advised her of potential rights to relief under Sec. 6015. As a result, P was unaware of her rights until late 2001. On Feb. 17, 2002, she filed a claim for relief from the unpaid joint liability under Sec. 6015(f). However, the IRS denied relief because the request came more than two years after the initial collection activity in 1999.

Discussion

Under Sec. 6015(b)(1)(E) and (c)(3)(B), relief requests under Sec. 6015(b) and (c) must be made not later than two years after “the Secretary has begun collection activities.” Sec. 6015(f) does not impose an SOL. However, according to Rev. Proc. 2000-15, Section 5, Sec. 6015(f) requests must also be made within two years “of the first collection activity against the requesting spouse.” The IRS maintains that the 1999 offset was a “collection activity.” However, it also asserts that it was not required to send a “collection-related notice” to P, because the offset only merited an “accounting adjustment” notice.

The two-year SOL period applicable to Sec. 6015(b) and (c) was added to the Code by the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA). Section 3501 required the Service to change collection-related notices to inform individuals subject to joint liability of their rights to relief under Sec. 6015. IRSRRA Section 3501 is part of the public law, but was not codified; however, it has the force of law (see, e.g., James A. Rochelle, 116 TC 356 (2001), aff’d, 293 F3d 740 (5th Cir. 2002) and Eric E. Smith, 114 TC 489 (2000), aff’d, 275 F3d 912 (10th Cir. 2001)).

The IRS offers inconsistent meanings of the word “collection” in the context of offsets in Rev. Proc. 2000-15, Section 5, and IRSRRA Section 3501(a). It argues that collection actions requiring notice only occur when the taxpayer retains a right to prevent the actual collection action from occurring. However, IRSRRA Section 3501 makes no such distinction and requires notice regardless of the type of collection activity.

Congress enacted the change to collection-related notices in connection with the same statutory scheme that added the two-year SOL to claims made under Sec. 6015(b) and (c). The legislative history makes it clear that Congress imposed the two-year SOL period as part of a new statutory mechanism that also requires the Service to alert taxpayers to their Sec. 6015 rights; see H. Conf. Rep’t No. 105-599, 105th Cong., 2d Sess. (1998), p. 251.

The notice of offset (the “accounting adjustment” notice) did not inform P of her Sec. 6015 rights, and, as a result, P was unaware of those rights to relief until she hired counsel in late 2001. However, the offset is a collection action; see Edwina D. Campbell, 121 TC 290 (2003). Accordingly, the notice of offset was a collection-related notice and should have included the information required by IRSRRA Section 3501(b).

The Service asserts that P’s claim is nonetheless barred by Rev. Proc. 2000-15’s two-year limitation period. The problem here is not with the language of the revenue procedure per se, but that the IRS’s interpretation of the revenue procedure in this case is inconsistent with its interpretation of the public law, and that interpretation causes a result inconsistent with the statutory scheme. It would be inequitable if the IRS could prevent review of a relief request under Sec. 6015(f) by failing to inform P of her right to relief, in defiance of a Congressional mandate. Accordingly, the running of the two-year period set forth in Rev. Proc. 2000-15 was not commenced by the collection activity in May 1999. The IRS’s contrary interpretation is an abuse of its discretion.

Natalie W. McGee, 123 TC No. 19 (2004)