Innocent Spouse Revisions: IRC 6015 Offers Hope for Spouses.

Author:Breakfield, Robert H.

Practitioners and their clients have been provided with a new road to follow in the pursuit of an innocent spouse claim. New Code Section 6015 and IRS announcements mandate a national standard procedure for review of innocent spouse claims. [1] A new easy to complete form has been released by the IRS. [2] A new appeal path is opened to the Tax Court for cases of assessed taxes that are presently under the jurisdiction of the collection division. [3]

In response to criticism of the Internal Revenue Service Code, Section 6015 was enacted as part of the 1998 IRS Restructuring and Reform Act. [4] In Code Section 6015, the IRS has developed revised procedures to review claims of an innocent spouse. [5]

The recently announced Service procedures, as set forth in Publication 971, provide immediate mitigation for taxpayers claiming innocent spouse relief. Issues addressed in Publication 971 are:

* The law applies to relief from unassessed taxes (returns currently under examination). [6]

* It applies to assessed but uncollected taxes. [7]

* The IRS suspends all enforced collection actions against any taxpayer who files a Form 8857 until a final administrative review of the claim. [8]

* Innocent spouse determination by the Tax Court for resolution of cases where a statutory notice of deficiency has been issued is preserved under 6015. A major change permits Tax Court review for assessed taxes where the Service denies a post assessment claim for innocent spouse relief. [9]

* The new law creates a bright line method of relief for divorced or separated spouses and preserves the general relief provisions of old Code Section 6013(e) for married taxpayers. [10] Also added is a new provision that provides equitable relief where the tax due is not in dispute. [11]

In response to public demand for greater IRS accountability the Congress has provided clear guidelines for relief for innocent spouses by the enactment of IRC Section 6015. Examples of accountability issues were raised in the Congressional Record, February 12, 1998. [12]

* A fourth grade teacher divorced in 1995. The IRS put a lien on her house for taxes when her IRS employed husband failed to file their 1993 and 1994 returns. The husband filed late and forged her signature.

* A lien was placed on a disabled nurse's house for taxes dating back to the 1960s, even though her divorce decree explicitly stated that she was not responsible for her ex-husband's liability.

New Section 6015 details three areas of relief: [13]

  1. Divorced or separated spouses:

    1. May elect separate liability calculation to avoid additional assessments of taxes caused by the other spouse's erroneous items.

  2. Non-divorced spouses:

    1. Relief is offered if it can be established that the spouse did not know or have reason to know of the erroneous item of deduction, credit or income.

  3. In cases where there is no dispute as to the tax liability, an innocent spouse claim can be honored for assessed but underpaid taxes if the innocent spouse can provide appropriate grounds for equitable relief.

    Cases of Divorced or Separated Spouses: Standard for Relief

  4. The taxpayers must be no longer married, must be legally separated, or have lived apart at all times during the 12 month period prior to the date that Form 8857 is filed (a widow or widower is considered no longer married). [14]

    When completing Form 8857 the taxpayer seeking relief must:

    1. Show the total amount of understated tax.

    2. For each item that resulted in the understatement, the taxpayer must explain why the item is attributable to the non-innocent spouse taxpayer. [15]

    Publication 971 Provides Two Examples:

    * Under reported income earned by the former spouse, plus any related self-employment tax would be allocated to the non-innocent spouse. [16]

    * An overstated deduction of home mortgage interest on a home jointly owned that was paid from a joint checking account would be allocated between both the innocent spouse and the other spouse (The result is a partial release). [17]

  5. Separate calculation of liability does not apply if the innocent spouse signed the joint return and the innocent spouse claimant knew about any item that would result in part or all of the understatement. [18] To the extent that the innocent spouse knew of the erroneous item, that item would not qualify for the recalculation. This provision is a major change from old Section 6013(e) that required no actual knowledge of the error and no reason to know of the erroneous item. Section 6015 (c)(3)(C) requires the IRS to prove...

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