IRS Removes Two-Year Deadline for Requesting Equitable Innocent Spouse Relief

This article was previously published in AICPA Tax Insider

As a result of the continual efforts of the national taxpayer advocate and the possibility of congressional action in response, the IRS gave up on the two-year limitation period for requesting innocent spouse equitable relief and issued new guidance expanding the factor of spousal abuse and financial control in determining whether equitable relief is warranted. It took National Taxpayer Advocate Nina Olson to admit that the treatment of an innocent spouse by the IRS in a recent Tax Court case (Stephenson, T.C. Memo. 2011-16) "has made me ashamed of the IRS." (Stokeld, "Taxpayer Advocate Blasts IRS's Handling of Innocent Spouse Case, Calls for Change," 130 Tax Notes 554 (Jan. 31, 2011)).

Background

The innocent spouse provisions were designed to alleviate the harshness of the joint and several liability that results from a jointly filed return. The current innocent spouse provisions of Sec. 6015 were enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, to make relief easier. Three avenues of relief are provided.

The first avenue provides spousal relief from understatements of tax attributable to erroneous items of one spouse, if the spouse requesting relief did not know and had no reason to know of the understatement and it would be inequitable to hold that spouse responsible for the understatement. Relief under this avenue is available only for understatements of tax, not underpayments, and the request for relief must be made within two years of the first collection action by the IRS (Sec. 6015(b)).

The second avenue of relief is available if the spouse requesting relief is divorced, legally separated, or has been living apart from the other spouse for more than 12 months. Essentially, the joint return filed by the spouses is undone, and each spouse is liable for a portion of the deficiency. Relief under the second avenue depends on the spouse requesting relief having no actual knowledge of the item that gave rise to the deficiency (as opposed to not knowing or having reason to know, the standard for relief under Sec. 6015(b)). As required under Sec. 6015(b), relief under Sec. 6015(c) must also be requested within two years of the first IRS collection activity.

The third avenue of relief, commonly referred to as "equitable" innocent spouse relief, provides for relief for underpayments and understatements when "taking into account all...