Innocent spouse relief under Rev. Proc. 2013-34.

• Author: Clark, Robin

On Sept. 16,2013, the IRS issued Rev. Proc. 2013-34. The new revenue procedure revised the rules for taxpayers who request equitable relief from joint and several tax liability under Sec. 6015(f) or from tax liability arising from the operation of community property laws under Sec. 66(c).

Background

Spouses who file a joint income tax return are jointly and severally liable for income tax arising from the joint return under Sec. 6013(d)(3). In limited circumstances, a spouse who files a joint return can file a request for relief from joint tax liability, which takes one of three forms under Sec. 6015: innocent spouse relief, separation-of-liability relief, or equitable relief. Even a spouse who has not filed a joint return may have tax liability resulting from the operation of community property laws if the spouse lives in a community property state. Those spouses may seek relief under Sec. 66. Secs. 6015(f) (1) and 66(c) (2) each allow the IRS to grant equitable relief if, taking into account all the facts and circumstances, the IRS determines that it would be inequitable to hold a spouse liable for the tax liability.

Rev. Proc. 2013-34 provides guidance to taxpayers seeking equitable relief under Secs. 6015(f) and 66(c) and is effective for requests for relief filed on or after Sept. 16, 2013, and for requests pending on that date, with the IRS, the Office of Appeals, or in a case docketed with a federal court. Rev. Proc. 2013-34 modifies and supersedes Rev. Proc. 2003-61.

Equitable Relief Under Rev. Proc. 2013-34

To qualify for equitable relief under Rev. Proc. 2013-34, the requesting spouse (3) must meet the threshold conditions that are set forth in Section 4.01 of the revenue procedure. If the threshold conditions are met, relief may be granted through either (1) a streamlined process as set forth in Section 4.02 of the revenue procedure, or (2) if the conditions for streamlined treatment are not met, a consideration of other facts and circumstances as set forth in Section 4.03. A requesting spouse seeking equitable relief under Sec. 66(c) or Sec. 6015(f) must file, within the time frame set forth in Sec. 4.01(3), Form 8857, Requestfir Innocent Spouse Relief or other similar statement signed under penalties of perjury

Section 4.01: Threshold Conditions

A requesting spouse who has filed a joint return must satisfy all the conditions in Section 4.01 of Rev. Proc. 201334 to qualify for equitable relief under Sec. 6015(f). A requesting spouse who is seeking equitable relief under Sec. 66(c) must satisfy all of the conditions other than the first two conditions, which relate to the filing of a joint return and to the requesting spouse's inability to qualify for relief under Sec. 6015(b) or (c). The general conditions for relief set forth in Secs. 4.01(1)--(7) are discussed in the following paragraphs.

1. Joint return: The first threshold condition that the requesting spouse must meet is that the requesting spouse filed a joint return for the tax year for which he or she is seeking relief. Again, this condition does not need to be met for Sec. 66(c) relief.

2. No relief under Sec. 6015(b) or (c): To qualify for equitable relief under Sec. 6015(f), the requesting spouse must establish that he or she is not entitled to innocent spouse relief under Sec. 6015(b) or separation-of-liability relief under Sec. 6015(c).

3. Timely filed claim for relief Rev. Proc. 2013-34 significantly changes the time in which a requesting spouse must apply for equitable relief under Sec. 6015(f) or 66(c). (4) In contrast to the provisions in Rev. Proc. 2003-61, the length of time that a requesting spouse has to timely file a claim depends upon whether the requesting spouse is applying for relief from an unpaid tax liability or for a credit or refund of amounts paid. If the requesting spouse is applying for relief from liability (or a portion of liability) that remains unpaid, the claim for relief must be made on or before the collection statute expiration date (CSED), which is the expiration date for the limitation period on collection of the income tax liability Generally, this period is 10 years following the assessment of the tax (but may be extended under other provisions of the Code). If the requesting spouse is claiming a credit or refund of amounts paid, the claim must be made before the expiration of the statute of limitation on credit or refund, which generally is the later of (a) three years from the date the return was filed, and (b) two years from the time the tax was paid.

4. No fraudulent scheme: The requesting spouse and the nonrequesting spouse (5) must not have transferred any assets to the other as part of a fraudulent scheme.

5. No transfer of disquaqied assets: The nonrequesting spouse did not transfer disqualified assets (6) to the requesting spouse. If the nonrequesting spouse transferred disqualified assets to the requesting spouse, relief is available only to the extent the income tax liability exceeds the value of the disqualified asset. Rev. Proc. 2003-61 did not take into account the presence of abuse or financial control when disqualified assets were transferred to the requesting spouse. Now, under Rev. Proc. 2013-34, even if there is a transfer of disqualified assets, relief may be granted to the requesting spouse if:

   1. The nonrequesting spouse abused the requesting spouse;

   2. The nonrequesting spouse maintained control over the household finances by restricting the requesting spouse's access to financial information; or

   3. The requesting spouse did not have actual knowledge that the disqualified assets were transferred.

6. No fraudulent return filed: The requesting spouse did not knowingly participate in filing a fraudulent return.

7. Attributable to nonrequesting spouse: For a requesting spouse to be granted equitable relief, the income tax liability from which the requesting spouse is seeking relief must be attributable (in full or in part) to (a) an item of the nonrequesting spouse, or (b) an underpayment resulting from the nonrequesting spouse's income. Notwithstanding the attribution rule, the IRS will consider granting equitable relief regardless of whether the understatement, deficiency, or underpayment is attributable to the requesting spouse if any of the following exceptions apply:

   1. The item is wholly or partially attributable to the requesting spouse solely due to the operation of community property law;

   2. The requesting spouse has nominal ownership in the item;

   3. The nonrequesting spouse misappropriated the funds intended to pay the tax, and the requesting spouse did not know or have reason to know of the misappropriation;

   4. The requesting spouse was the victim of abuse before the return was filed, and, as a result of that abuse, the requesting spouse was not able to challenge the treatment of any items on the return or was not able to question the payment of any balance due reported on the return for fear of the nonrequesting spouse's retaliation; or

   5. The nonrequesting spouse's fraud is the reason for the erroneous item.

   Rev. Proc. 2013-34 added the exception for the nonrequesting spouse's fraud.

   Section 4.02 Streamlined Determinations for Relief

   If each threshold condition of Section 4.01 is fulfilled, the IRS will make a streamlined determination for equitable relief under Secs. 6015(f) and 66(c), provided that the requesting spouse meets the three criteria set forth in Section 4.02 of Rev. Proc. 2013-34 regarding marital status, economic hardship, and knowledge or reason to know. Under Rev. Proc. 200361, a streamlined determination was available only for underpayment cases. Now, Rev. Proc. 2013-34 explicitly provides that streamlined determinations apply to understatement cases as well. The circumstances under which the IRS will make a streamlined determination are:

1. The requesting spouse is no longer married to the nonrequesting spouse as set forth in Section 4.03(2)(a);

2. The requesting spouse will suffer economic hardship if equitable relief is not granted as set forth in Section 4.03(2)(b); and

3. (a) For Sec. 6015(f) cases, on the date the requesting spouse signed the joint return, the requesting spouse did not know or have reason to know there was an understatement or deficiency on the joint return or did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment or the tax reported on the return. If the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return or challenge the nonrequesting spouse's assurance regarding paying the taxes, for fear of the nonrequesting spouse's retaliation, then the abuse or financial control will result in this factor being...