IRS New Revenue Procedure for Innocent Spouse Equitable Relief (9/21/13)

The IRS has released Rev. Proc. 2013-34, 2013-42 IRB 1, here, which " provides guidance for a taxpayer seeking equitable relief from income tax liability under section 66(c) or section 6015(f) of the Internal Revenue Code (a “requesting spouse”)."  Section 66 dealing with community income is here; Section 6015 dealing with joint return joint and several liability is here.  The statutes and the entire Rev. Proc. are required reading for those studying and practicing in this area.  I provide here only the portions of the Rev. Proc. dealing with background and significant changes:

SECTION 2. BACKGROUND 

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.03 Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid and there is no valid return with respect to the requesting spouse. The individual is not jointly and severally liable for any income tax liabilities arising from that return. In that case, section 6015 does not apply and is not necessary for obtaining relief. If an individual files a claim for relief under section 6015, but also maintains that there is no valid joint return due to duress, the Service will first make a determination as to the validity of the joint return and may accordingly deny the request for section 6015 relief based on the fact that no joint return was filed (and thus, relief is not necessary). If it is ultimately determined that a valid joint return was filed, the Service will then consider whether the individual would be entitled to relief from joint and several liability on the merits. 

.04 Under section 6015(b) and (c), relief is available only from an understatement or a deficiency. Section 6015(b) and (c) do not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief from an underpayment of income tax or from a deficiency. The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse "does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse's benefit." H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for the Secretary to exercise the equitable relief authority under section 6015(f) in other situations if, "taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return." Id.

SECTION 3. SIGNIFICANT CHANGES 

On January 5, 2012, the Department of Treasury and the Service released Notice 2012-8, 2012-4 I.R.B. 309, which set forth a proposed revenue procedure to update and revise Rev. Proc. 2003-61, 2003-2 C.B. 296. Notice 2012-8 also modified and clarified the criteria for equitable relief, and it eliminated the two-year rule for filing a claim for relief as set forth in Notice 2011-70, 2011-2 C.B.135. Notice 2012-8 invited public comment regarding the proposed revenue procedure. A total of 54 comments were received, 45 of which were general comments either in support of the revisions, asking for assistance in specific cases, or totally unrelated to innocent spouse relief. The nine substantive comments ranged from discussing one or two discrete issues to commenting on all aspects of the proposed revenue procedure and innocent spouse relief in general. Treasury and the Service considered all comments received, and the proposed revenue procedure has been modified to take into account many of the concerns raised. 

This revenue procedure supersedes Rev. Proc. 2003-61. The structure and format of this revenue procedure generally follows that of Rev. Proc. 2003-61 with the following significant changes: 

.01 This revenue procedure gives greater deference to the presence of abuse than Rev. Proc. 2003-61. The Service recognizes that the issue of abuse can be relevant with respect to the analysis of other factors and can negate the presence of certain factors. This change is intended to give greater weight to the presence of abuse when its presence impacts the analysis of other factors. 

.02 The timeliness threshold condition in section 4.01(3) of this revenue procedure provides that a request for equitable relief under section 6015(f) or section 66(c) must be filed before the expiration of the period of limitation for collection under section 6502 to the extent the taxpayer seeks relief from an outstanding liability, or before the expiration of the period of limitation for credit or refund under section 6511 to the extent the taxpayer seeks a refund of taxes paid. This is a significant change to the requirement in Rev. Proc. 2003-61, section 4.01(3), and Treas. Reg. § 1.6015-5(b)(1) (TD 9003), that the requesting spouse's claim for equitable relief must be filed no later than two years after the date of the Service's first collection activity. See Notice 2011-70, 2011-2 C.B. 135. In response to a comment received with respect to Notice 2012-8, section 4.01(3)(a) refers to the period of limitation for collection as its commonly used IRS term -- Collection Statute Expiration Date or CSED. 

.03 The attribution threshold condition in section 4.01(7) of this revenue procedure adds a new exception in paragraph (e) to the requirement that the income tax liability must be attributable to an item of the nonrequesting spouse. Under section 4.01(7)(e) of the revenue procedure, relief would not be precluded for an item attributable to the requesting spouse if the nonrequesting spouse's fraud gave rise to the understatement of tax or deficiency. 

.04 Streamlined determinations under section 4.02 of this revenue procedure now apply to understatements of income tax instead of only underpayments as under Rev. Proc. 2003-61. Section 4.02 also now applies to claims for equitable relief under section 66(c). 

.05 Section 4.03(2) of this revenue procedure clarifies that no one factor or a majority of factors necessarily controls the determination. Therefore, depending on the facts and circumstances of the case, relief may still be appropriate if the number of factors weighing against relief exceeds the number of factors weighing in favor of relief, or a denial of relief may still be appropriate if the number of factors weighing in favor of relief exceeds the number of factors weighing against relief. 

.06 The economic hardship factor in section 4.03(2)(b) of this revenue procedure now provides minimum standards based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. Section 4.03(2)(b) also now provides that the lack of a finding of economic hardship does not weigh against relief, as it did under Rev. Proc. 2003-61, and instead will be neutral. 

.07 The knowledge factor for understatement cases in section 4.03(2)(c)(i) of this revenue procedure clarifies how the factor works in cases involving equitable relief under section 66(c), in addition to cases involving equitable relief under section 6015(f). Section 4.03(2)(c)(i)(A) provides that actual knowledge of the item giving rise to an understatement or deficiency will no longer be weighed more heavily than other factors, as it did under Rev. Proc. 2003-61. Further, section 4.03(2)(c)(i)(A) clarifies that, for purposes of this factor, 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 for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency. 

.08 The knowledge factor for underpayment cases in section 4.03(2)(c)(ii) of this revenue procedure now provides that, in determining whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax reported as due on the return, the Service will consider whether the requesting spouse reasonably expected that the nonrequesting spouse would pay the tax liability at the time the return was filed or within a reasonable period of time after the filing of the return. In response to comments received with respect to Notice 2012-8, section 4.03(2)(c)(ii) provides that a requesting spouse may be presumed to have reasonably expected that the nonrequesting spouse would pay the liability if a request for an installment agreement to pay the tax was filed by the later of 90 days after the due date for payment of the tax, or 90 days after the return was filed. Further, section 4.03(2)(c)(ii) clarifies that for purposes of this factor, 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 question the payment of the taxes reported as due on the return or challenge the nonrequesting spouse's assurance regarding payment of the taxes for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax liability. Finally, section 4.03(2)(c)(ii) provides that if the requesting spouse did not reasonably expect that the nonrequesting spouse would pay the tax liability reported on an amended return that was based on items not properly reported on the original return, the Service will also consider whether the requesting spouse knew or had reason to know of the understatement on the original return. 

.09 The legal obligation factor in section 4.03(2)(d) of this revenue procedure clarifies that a requesting spouse's legal obligation to pay outstanding tax liabilities is a factor to consider in determining whether equitable relief should be granted, in addition to whether the nonrequesting spouse has a legal obligation to pay the tax liabilities. 

.10 The significant benefit factor in section 4.03(2)(e) of this revenue procedure provides that any significant benefit a requesting spouse may have received from the unpaid tax or understatement will not weigh against relief (will be neutral) if the nonrequesting spouse abused the requesting spouse or maintained financial control and made the decisions regarding living a more lavish lifestyle. Further, section 4.03(2)(e) provides that if only the nonrequesting spouse significantly benefitted from the unpaid tax or understatement, and the requesting spouse had little or no benefit, or the nonrequesting spouse enjoyed the benefit to the requesting spouse's detriment, this factor will weigh in favor of relief. Section 4.03(2)(e) also provides that if the amount of unpaid tax or understatement of tax was small such that neither spouse received a significant benefit, then this factor is neutral. In response to comments received with respect to Notice 2012-8, section 4.03(2)(e) provides that the determination that the tax liability was small such that neither spouse received a significant benefit will vary depending on the facts and circumstances of each case. 

.11 The compliance with the income tax laws factor in section 4.03(2)(f) of this revenue procedure now provides that a requesting spouse's subsequent compliance with all Federal income tax laws is a factor that may weigh in favor of relief, instead of always being neutral under Rev. Proc. 2003-61. 

.12 Section 4.04 of this revenue procedure broadens the availability of refunds in cases involving deficiencies by eliminating the rule in section 4.04(1) of Rev. Proc. 2003-61 that limited refunds in cases involving deficiencies to payments made by the requesting spouse pursuant to an installment agreement.

Additional resources:

• New Procedures for Equitable Innocent Spouse Relief  (The Tax Adviser (AICPA) 9/16/13), here.
• Michael Cohn, IRS Streamlines Innocent Spouse Relief (TaxProToday 9/17/13), here.