IRS Expands Situations in Which Innocent Spouse Relief Will Be Granted
(Parker Tax Publishing: September 29, 2013)

A new revenue procedure provides the new factors that the IRS will consider in determining whether to grant either equitable relief from joint and several liability under Code Sec. 6015(f) or equitable relief from income tax liability resulting from the operation of community property law under Code Sec. 66(c). Rev. Proc. 2013-34.

Code Sec. 6015 provides three types of relief from joint and several liability: (1) full or apportioned relief (i.e., innocent spouse relief) under Code Sec. 6015(b); (2) proportionate relief for divorced or separated taxpayers (i.e., separation of liability relief) under Code Sec. 6015(c); and (3) equitable relief under Code Sec. 6015(f) when relief is unavailable under either Code Sec. 6015(b) or Code Sec. 6015(c). In addition, Code Sec. 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return.

In 2012, the IRS released Notice 2012-8, which set forth a proposed revenue procedure to update and revise Rev. Proc. 2003-61. Notice 2012-8 also modified and clarified the criteria for equitable relief, and eliminated the two-year rule for filing a claim for relief. The IRS has now released Rev. Proc. 2013-34, which supersedes Rev. Proc. 2003-61 and, based on comments by practitioners, contains the following significant changes to Rev. Proc. 2003-61:

(1) Greater deference is given to the presence of spousal abuse than Rev. Proc. 2003-61. According to the IRS, 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.

(2) The time for filing a relief request under Code Sec. 6015(f) or Code Sec. 66(c) is expanded. A request for equitable relief under either provision must be filed before the expiration of the limitations period for collection under Code Sec. 6502 to the extent the taxpayer seeks relief from an outstanding liability, or before the expiration of the limitations period for credit or refund under Code Sec. 6511 to the extent the taxpayer seeks a refund of taxes paid. Rev. Proc. 2003-61 had imposed a two-year filing requirement. Rev. Proc. 2013-34 refers to the period of limitation for collection as its commonly used IRS term Collection Statute Expiration Date or CSED.

(3) The attribution threshold condition adds a new exception to the requirement that the income tax liability must be attributable to an item of the nonrequesting spouse. Under this exception, 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.

(4) Streamlined determinations now apply to understatements of income tax instead of only underpayments, and also apply to claims for equitable relief under Code Sec. 66(c).

(5) No one factor or a majority of factors necessarily controls the determination of whether relief will be granted. 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.

(6) The economic hardship factor in Rev. Proc. 2013-34 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. It 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.

(7) Actual knowledge of the item giving rise to an understatement or deficiency is no longer more heavily weighed than other factors, as it was under Rev. Proc. 2003-61. Further, Rev. Proc. 2013-34 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.

(8) The knowledge factor for underpayment cases in Rev. Proc. 2013-34 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 IRS 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. 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.

(9) Rev. Proc. 2013-34 clarifies that, with respect to the knowledge 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.

(10) The legal obligation factor in Rev. Proc. 2013-34 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.

(11) The significant benefit factor in Rev. Proc. 2013-34 provides that any significant benefit a requesting spouse may have received from the unpaid tax or understatement will not weigh against relief (i.e., 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, 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. Further, 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. 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.

(12) The compliance with the income tax laws factor in Rev. Proc. 2013-34 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 as it was under Rev. Proc. 2003-61.

(13) Finally, Rev. Proc. 2013-34 broadens the availability of refunds in cases involving deficiencies by eliminating the rule in Rev. Proc. 2003-61 that limited refunds in cases involving deficiencies to payments made by the requesting spouse pursuant to an installment agreement.

For a discussion of equitable relief under Code Sec. 6015(f) and Code Sec. 66(c), see Parker Tax ¶260,560.

Parker Tax Publishing Staff Writers

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