As of September 16, 2013, the IRS has revised procedures for spouses who wish to request equitable relief from tax liability under the innocent spouse rules. Significant changes were made to previous guidance, mainly that the IRS will now give greater weight to proof of economic hardship and abuse in marital situations.
With these changes, more claims are being filed and taxpayers can move toward fitting into Rev. Proc. 2013-34’s more nuanced considerations of the facts and circumstances. It’s also likely that equitable relief will be granted more since the two-year limitation period has been lifted. Taxpayers may now consider whether the new criteria favor a filing or revising a previous request for innocent spouse relief.
When a couple file a joint return, each is jointly and severally liable for the full amount of tax on the couple’s combined income, including any tax deficiencies assessed after an audit. To redress this harshness of the joint/several liability rule, the code was implemented to allow an innocent spouse to request three types of relief provisions: (1) Relief to “innocent spouses” who were unaware of tax understatements attributable to the other spouse; (2) Allows joint return filers who are widowed, divorced, legally separated, or have lived apart for at least one year to limit their liability for deficiencies on the joint return; (3) Allows joint return filers to avoid liability for unpaid amounts of tax shown on joint returns as filed, but not paid, or allows joint return filers to avoid liability for a deficiency that does not qualify for relief under either Code Sec. 6015(b) — traditional innocent spouse relief — or Code Sec. 6015(c) — allocation of liability.
To be considered for relief, the requesting spouse must have filed a return for the year in which relief is sought, assets weren’t transferred between spouses as part of a fraudulent scheme, disqualified assets were transferred, the spouse seeking relief didn’t file a return with intent to defraud, and liability from which the requesting spouse seeks relief is attributable to an item or underpayment resulting from the nonrequesting spouse’s income. Generally, relief will be granted if the requesting spouse is no longer married or hasn’t been a member of same household at any time during a 12-month period ending the date relief was requested; if at the time the return was filed, the requesting spouse had reason to believe that tax would be paid by the other spouse; and if the innocent spouse would suffer economic hardship if relief wasn't granted.
To obtain relief under these above provisions, make a timely election on IRS Form 8857 no later than two years after the IRS begins a collection process. Request for equitable relief of an unpaid liability must be made before the expiration of the period of limitations on collection of a tax liability, or generally within 10 years from assessment of the tax. When making claim for credit or refund, the request must be made the later of three years from the date the return was filed, or two years from the date the tax was paid.