Domestic relations provisions of the IRS Restructuring and Reform Act of 1998.

• Author: Steinberg, Robert S.

The IRS Restructuring and Reform Act of 1998 (RARA), signed by President Clinton on July 22, 1998, contains important new provisions dealing with taxpayer's rights and also provisions that correct or modify The Taxpayer Relief Act of 1997. This article will summarize the new domestic relations provisions.

Joint and Several Liability

IRC [sections] 6013(d)(3) provides: "If a joint return is made, the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several." Before the changes discussed below, each spouse was potentially liable for the full amount of the tax or any deficiency in tax, penalties, or interest; and one spouse could not insist that the IRS first collect the tax or deficiency against the other. The only theoretical escape hatch from joint and several liability was contained in IRC [sections] 6013(e), the so-called "innocent spouse" provision. To qualify the innocent spouse had to prove that he or she had filed a joint return in which there was a substantial understatement of tax attributable to grossly erroneous items of the other spouse about which he or she did not know and had no reason to know and that, under all of the facts and circumstances, it would be inequitable to hold the innocent spouse liable for the tax. There were dollar limitations and percentage of income tests for the terms "substantial understatement" and "grossly erroneous items" which had to have "no basis in law or fact."[1] The bottom line was that courts rarely found one to qualify as an innocent spouse. Thus, in practice, there was no relief from joint and several liability.

Election to Limit Liability. New IRC [sections] 6015(c) establishes an election which, if properly effectuated, limits one spouse's income or self-employment tax liability to that portion of the tax deficiency attributable to his or her own erroneous items on a joint return and excludes those attributable to his or her spouse. The election applies to tax liabilities arising after the date of enactment (July 22, 1998) as well as to any liability arising on or before the date of enactment that remains unpaid on the date of enactment. The two-year election period will not expire before two years after the first qualifying collection activity taken by the IRS after the date of enactment.[2] The items allocated to a spouse are those that would have been allocated to that spouse on a married filing separate return.

Eligibility to Make the Election. Marital status is the linchpin. The election is available to one who has filed a joint return and, at the time the election is filed, with regard to the other spouse, is either: 1) no longer married; 2) legally separated; or 3) was not a member of the same household with the other spouse at any time during the 12-month period immediately preceding the election.

Time for Making Election. The election must be made not later than two years after commencement of IRS collection activity against the spouse seeking to make the election (e.g., garnishment of wages or notice of intention to levy directed against the electing spouse; but, not mailing of notice of deficiency, addressed to both spouses, to last known address of electing spouse).[3]

How Election Made. The IRS is to create a form for making the election within 180 days from the date of enactment. The author suggests that, in the meanwhile, taxpayers file a separate statement titled, "Election under IRS [sections] 6015(c)." The statement should recite that the executing spouse is electing...