IRS Error Gives Taxpayer Day in Court on Claim for Innocent Spouse Relief

(Parker Tax Publishing September 2021)

The Tax Court held that when the IRS erroneously issued a final determination denying a taxpayer's second request for innocent spouse relief on the merits, the court had jurisdiction to determine the appropriate relief available, even though the IRS previously issued a final determination denying relief for the same year and the taxpayer failed to timely file a Tax Court petition. The court found that the IRS could have denied the taxpayer's second request for relief without issuing a final determination but having done so, the letter conferred jurisdiction on the Tax Court. Vera v. Comm'r, 157 T.C. No. 6 (2021).

Background

For 2010 and 2013, Nilda Vera filed joint returns with her (then) spouse. For 2010, the IRS determined a deficiency that was assessed as a joint liability. For 2013, the tax shown on the return was not paid in full, resulting in an underpayment of tax. The IRS assessed the tax liability and associated penalties.

In early 2015, Vera filed a Form 8857, Request for Innocent Spouse Relief, relating solely to the 2013 underpayment. In March 2016, the IRS issued a final determination letter denying relief. Under Code Sec. 6015(e)(1)(A), a taxpayer may petition the Tax Court, and the Tax Court has jurisdiction, if the taxpayer files no later than 90 days after the IRS mails a notice of the IRS's final determination of relief available to the individual. The IRS's determination included instructions for challenging that determination in the Tax Court, including an explanation of the 90-day deadline for filing a petition. Ninety-one days from the date of the IRS's determination, Vera mailed a petition to the Tax Court challenging the denial of innocent spouse relief. The IRS filed a motion to dismiss for lack of jurisdiction, which the court granted.

In November 2016, Vera filed another request for innocent spouse relief, again submitting Form 8857. She listed only 2010 as the year for which she was seeking relief. However, she included with that form a variety of documents, including a copy of her Form 8857 for 2013. In a determination dated March 14, 2019, the IRS denied the request for relief that Vera had filed in November 2016. That denial was styled as a Letter 3288, Final Appeals Determination. The header of that letter specified only 2010 as the tax year. In contrast, the substance of the determination addressed both 2010 and 2013 and, with regard to year 2013, stated that Vera "didn't comply with all income tax laws for the tax years that followed the years that are the subject of your claim."

Vera filed a timely petition challenging the IRS's determination. On the petition form, she listed 2010 and 2013 as the years for which the notices were issued. The IRS filed a motion to dismiss for lack of jurisdiction as to 2013. According to the IRS, the March 14, 2019, determination was not a second final determination for 2013. The IRS also claimed that the inclusion of year 2013 in the letter was an error.

Analysis

The Tax Court denied the IRS's motion for summary judgment and held that it had jurisdiction over both years 2010 and 2013 since the IRS issued a final determination for those years that unambiguously denied innocent spouse relief on the merits.

While Code Sec. 6015(e) provides that a taxpayer may petition the Tax Court to review the IRS's final determination on innocent spouse relief, the court reasoned that nothing prohibits the IRS from issuing more than one final determination as to a given tax year. The court found that the regulations under Code Sec. 6015 in fact leave open the possibility for the IRS to issue a second final determination. For instance, if a requesting spouse changes marital status, Reg. Secs. 1.6015-1(h)(5), 1.6015-5(c)(1), and 1.6015-3, permit a second claim, resulting in a second final determination. The court noted that the Internal Revenue Manual (IRM) addresses a similar situation which arises when a delay or error imposes an unfair burden on the requesting spouse and the IRS exercises its discretion to issue a second final determination. IRM 25.15.17.7 specifically cautions that a second determination issued under such limited circumstances grants the requesting spouse the right to petition the Tax Court. In addition, IRM 25.15.17.5(1) provides that upon request, the IRS also may reconsider previous requests and if the IRS determines relief is appropriate, the IRS may change its final determination. In such situations, IRM 25.15.17.5 specifically cautions agents that reconsideration decisions should not be issued through final determination letters.

The court cited Barnes v. Comm'r, 130 T.C. 248 (2008), as an example of the IRS denying reconsideration without issuing a second final determination. In Barnes, the IRS denied the taxpayer's request for innocent spouse relief in a final determination. Several years later, the taxpayer submitted a second request for relief concerning the same year. The IRS denied her request using Letter 3657C, No Consideration Innocent Spouse. The court reviewed the letter and concluded that it did not purport to be a final notice of determination or an amendment to the original notice of final determination. The court also commented that it did not believe the 90-day limitation period of Code Sec. 6015(e)(1)(A) should be defeated or protracted by the simple expedient of filing a succession of duplicative claims. In this case, the Tax Court found that the policy concern regarding duplicative claims could have been avoided; had the IRS issued a Letter 3657C to Vera (like the one issued in Barnes and as the IRM instructs), the court would not be faced with such a situation. But the court found that the letter the IRS issued to Vera was a second final determination as to 2013, which the IRM acknowledges grants the requesting spouse the right to petition the Tax Court.

The Tax Court rejected the IRS's argument that the inclusion of the 2013 tax year in the letter was an error. The court said that error or not, the IRS's notice was unambiguous in its denial as to both 2010 and 2013. The description for denial of relief as to 2013 related solely to the merits of relief, the court found, and nowhere in the letter did the IRS describe a rejection on the basis of an improper second request. The court further found that it had previously ruled in other contexts that a notice sent in error nonetheless conferred jurisdiction. For instance, in Ringo v. Comm'r, 143 T.C. No. 15 (2014), the court found that, despite an IRS letter attempting to retract an earlier letter stating that an individual was ineligible for a whistleblower award, the IRS's initial letter was a determination that vested the court with jurisdiction. In Hannan v. Comm'r, 52 T.C. 787 (1969), the court held that an erroneously determined deficiency did not deprive the court of jurisdiction. Likewise, in Kim v. Comm'r, T.C. Memo. 2005-96, a timely filed petition from an erroneously issued notice of determination by the IRS Office of Appeals vested the court with jurisdiction. According to the Tax Court, the common principle underlying these cases is that, when evaluating whether a notice serves as the predicate for the court's jurisdiction, the court generally does not look beyond the face of the notice unless its text is ambiguous or inconsistent. The notice issued to Vera was an unambiguous final determination denying relief as to both 2010 and 2013, and a timely petition therefore vested the court with jurisdiction over both years.

For a discussion of innocent spouse relief, see Parker Tax ¶260,560.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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