The Internal Revenue Service made a policy change recently that shows an agency many people fear and loathe can also make common-sense decisions.
Effective immediately, the IRS will eliminate a ridiculous two-year limit that applied to a certain type of “innocent spouse” relief request. An innocent spouse is a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. The policy change will not only apply to people who file future claims but also to some taxpayers whose claims were rejected in the past.
“It was the right thing to do, to give as much a window as possible, to allow people to come in and ask for that relief,” IRS Commissioner Doug Shulman said in an interview.
Under the innocent spouse umbrella are three types of relief — the innocent spouse provision itself (a tough enough contention to prove), plus categories for separation of liability and equitable relief. The removal of the two-year limit only affects requests under the equitable relief provision.
You have to meet several conditions to qualify for the innocent spouse relief provision, which relieves you of responsibility for paying tax, interest and penalties if your spouse did something wrong on your joint tax return. One of the conditions is that you have to establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax.
Under separation of liability, the IRS essentially allows the innocent spouse to pay the taxes he or she is responsible for and then pursues the other spouse (or former spouse) for his or her understatement of taxes, including interest and penalties.
If you do not qualify for either of the first two provisions, then you can try for equitable relief, which is a sort of catchall provision that allows the IRS to consider additional factors. For example, you didn’t know your spouse or former spouse misappropriated money intended to pay your joint tax bill for his or her benefit.
The law that set up the innocent spouse and separation of liability provisions mandated that taxpayers apply for relief within two years from the date of the first IRS collection activity. The law didn’t make that same requirement for equitable relief requests.
However, the IRS, under its rule-making authority, decided to apply the two-year window to the equitable relief provision.
But what if a spouse was being abused or bullied and, although she may have known about the collection effort, was too afraid of her abuser to take action? It didn’t matter. She had to file within two years or was out of luck.
Many saw the injustice in the regulation, especially in regard to victims of domestic abuse, and began to pressure the agency to get rid of the two-year window.
Dozens of members of Congress had been pushing for a policy change. Nina Olson, the national taxpayer advocate, made elimination of the two-year rule one of her top legislative recommendations to Congress.
“In practice, many individuals who otherwise qualified for equitable innocent spouse relief had no idea the IRS had initiated collection activity because the other spouse had concealed that information,” Olson said in a statement.
Shulman, who in recent years has made a number of policy changes to help financially embattled taxpayers, said he had always intended to address this issue.
“I wanted to make sure I understood this situation,” he said. “My job is to make sure we do the right thing every day and that we are treating every taxpayer fairly.”
The IRS said it receives about 50,000 innocent spouse requests every year. About 2,000 requests a year filed under the equitable relief provision are rejected because the taxpayer hadn’t sought relief within the two-year period.
Going forward, the IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency. If your request was previously denied solely because of the two-year limit, you may reapply using IRS Form 8857 “Request for Innocent Spouse Relief” if the collection statute of limitations for the tax years involved has not expired.
The agency will not apply the two-year limit in any pending litigation involving equitable relief. And if your litigation is final, the agency will suspend collection action under certain circumstances.
If you file a joint return, you had better be aware that you and your spouse are jointly and individually responsible for the tax and any interest or penalty due on the joint return, even if you later divorce.
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