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: 

Summary of the Innocent Spouse Provisions (1/19/13)

In Wilson v. Commissioner,  705 F.3d 980 (9th Cir. 2013), here, the Ninth Circuit held that the Tax Court review of the IRS's denial of innocent spouse relief under Section 6015(f), here, is de novo, so that new matters raised for the first time before the Tax Court may be considered.  The Court rejected the Government's argument that, as a review of the IRS's exercise of discretion, the review should not be de novo but for abuse of IRS's discretion on the basis of the administrative record provided to the IRS to use in the exercise of its discretion.   There is a dissent in Wilson that, properly construed, the review should be based on the administrative recorrd.

The Tax Court holds that review is de novo, and has now been sustained in that holding Wilson and the other other circuit to address the issue.  Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009).  Wilson offers a good analysis of the statutory interpretation analysis the Court used to reach that interpretation.  I commend the decision to readers who are interested in statutory interpretation.

I blog this case principally because of its summary of the history and current status of the innocent spouse provisions (including administrative processing) currently appearing in Section 6015, here.  Here is that summary (footnotes omitted)

Thousands of citizens each year discover to their surprise that they are liable for their former spouse's tax debt. Most of them are recently divorced, separated, or widowed women. Many are victims of domestic abuse, whose ability to review or correct a joint return before it is filed is impaired. A substantial number are low-income, single parents. 

Congress has not turned a blind eye to this situation, and the legislative history of its response is important to our understanding of the Tax Court's role. 

Before 1918, each spouse was required to file a separate return. In 1918, Congress first permitted married couples to file a joint return, and in 1921 clarified that the tax on a joint return was to be computed on aggregate income. Shortly thereafter, the Internal Revenue Service ("IRS") took the position that each spouse was individually responsible for the entire tax debt. However, we rejected that joint and several liability interpretation in 1935 and held that the IRS should apportion tax liability on the basis of each spouse's respective income. Cole v. Comm'r, 81 F.2d 485, 489 (9th Cir. 1935). Congress legislatively overruled Cole in 1938, adopting the IRS theory of joint and several marital tax liability, and in 1948 created a separate tax schedule for joint returns.