I love the smell of brand new tax regulations in the morning.
Finally! I was waiting for Carl Smith to write a guest blog at Procedurally Taxing about the new proposed IRS Regs on Innocent Spouse, and he did not disappoint. Innocent Spouse is such a fantastic area of the tax code because of the back-and-forth between the IRS, Tax Court, and U.S. Circuit Courts of Appeals on when a taxpayer actually qualifies for Innocent Spouse relief. In Simth’s first post on the new regulations, he gave us a useful rundown on how we got to the point we are now in the development of Innocent Spouse law and interpretation of that law. Everyone interested in the recent history of Innocent Spouse Relief should read it.Schedule a 20 minute consultation with Attorney Groth.
The recent history of Innocent Spouse Relief Law
Existing regulations under Sections 6015 and 66 were last issued in 2003. But since then, so much has changed. So much so that many of the regulations currently on the books are no longer good law. A few examples:
- Battle One: Tax Court Jurisdiction to hear Equitable Relief Claims. The current version of 6015(e) was passed after a long battle between the IRS, US Tax Court, and the Circuit Courts regarding whether or not the Tax Court had jurisdiction to hear claims under the equitable relief provisions of 6015(f). The IRS maintained that the Tax Court could not hear these cases, and the Tax Court took the position that it could hear these cases until it was reversed on appeal in both the Ninth and Eight Circuits. After being reversed in both Circuits, the Tax Court backed off and conceded in 2006 that it did not have jurisdiction to consider 6015(f) claims. Apparently Congress was so mad about this outcome that they amended Section 6015(e) at the end of 2006 to explicitly provide for Tax Court jurisdiction over 6015(f) (Equitable Relief) claims.
- Battle Two: Length of Time to Bring an Innocent Spouse Equitable Relief Claim. Section 6015(b) (Traditional Innocent Spouse Relief) and Section 6015(c) (Separation of Liability Relief) both provide a specific statute of limitations for raising an Innocent Spouse defense. In the case of relief requested under either one of these sections, taxpayers generally have 2 years from the start of collection activities to make a timely administrative claim for Innocent Spouse Relief. 6015(f) includes no such limitation, but the IRS apparently believed (before 2011) that it was appropriate to enforce a 2 year period of limitation on bringing a 6015(f) claim as well. The Tax Court reasoned that if Congress wanted a 2 year period of limitations, it would have written one in. But the higher Courts, appropriately, continued to reverse the Tax Court on this issue, stating that the IRS had the authority to pass regulations that imposed such limitations. Eventually – in the face of criticism from Congress, the IRS decided that it would no longer impose a 2-year statute of limitations on 6015(f) claims.
- Other Notable Innocent Spouse Precedents: In addition to these two specific (and mostly procedural) battles between the IRS, Tax Court, and Federal Courts of Appeal, there are some other notable decisions in Tax Court Innocent Spouse cases that expand the Tax Court’s ability to render truly independent “fresh look” decisions in Innocent Spouse cases, without giving much weight to previous IRS determinations in the specific case. These cases belong in their own blog post.
Changes Made in The Proposed Innocent Spouse Regulations
I am still reading through the new proposed changes to the regulations myself and I have some thoughts of my own that I will be sharing in the next couple of weeks. I also plan on submitting comments to the IRS on the regulations and I will likely be requesting a public hearing on the changes as well.
But for now, I will start by sharing what Carl Smith has to say about it.
[T]he new proposed regulations largely do four things: (1) make changes necessary to conform the existing regulations to the 2006 statutory amendments to subsection (e) concerning subsection (f) equitable relief, (2) adopt positions previously taken by the IRS in Rev. Proc. 2013-34, 2013-2 C.B. 397, that expanded the instances in which a requesting spouse could get a refund from post-return payments applied to the liability, (3) provide detailed new rules and examples concerning when a spouse, under section 6015(g)(2), “participated meaningfully” in a prior litigation such that the spouse is precluded by res judicata from later relitigating the right to section 6015 relief, and (4) provide detailed rules and examples concerning allocation of deficiencies among spouses in situations where one spouse’s unreported income or improper deductions changed adjusted gross income (AGI) such that a portion of the deficiency is attributable to a phase-out of tax benefits on the return.
Most notable, the new regulations provide that only one request for Innocent Spouse Relief can be made (and several examples are provided within the text of the regulation itself. The IRS also explicitly made Form 8857 a request for Innocent Spouse Relief under sections 6015(b), 6015(c) and 6015(f). The proposed regulations also deal with when refunds are available as the result of an Innocent Spouse Relief Request.
What do you think? Is the IRS overstepping here with any of the new proposed regulations, or is its reasoning solid and unimpeachable? I think it is a mixed bag. But more on that next time.
(Click here for an easy to read PDF version of the proposed changes to the IRS Innocent Spouse regulations.)