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IRS eases up on the ‘innocent spouse’ rules

by on
in Small Business Tax,Small Business Tax Deduction Strategies

There’s more hope for taxpayers who have to pay the tax bill of an estranged spouse through no fault of their own.

Alert: The IRS has issued a Notice proposing a new revenue procedure about the “innocent spouse” rules. (IRS Notice 2012-8) The changes make it easier to qualify for tax relief.

The IRS will begin using the revamped procedure immediately to address requests for relief. It supersedes Rev. Proc. 2003-61.

Here’s the whole story: Married taxpayers may benefit by filing a joint tax return, but each spouse is “jointly and severally” responsible for any tax, interest and penalties attributable to the return. This liability continues to apply if the couple later gets a divorce. Under the innocent spouse rules, a wronged individual may not be held liable if certain requirements are met.

The new Notice revises the rules in four critical ways:

1. The deadline for filing a request for relief changes from two years after the first collection activity by the IRS to the expiration of the statute of limitations for collection (or refund or credit).

2. Under current law, tax liability must be attributable to an item of the nonrequesting spouse. The new proposed procedure adds an exception for cases where the nonrequesting spouse’s fraud results in a tax understatement or deficiency.

3. No single factor, or majority of factors, will control the determination of whether relief is granted. Actual knowledge of the item in question will no longer be weighed more heavily than other factors.

4. Minimum standards based on income, expenses and assets will be used to determine if the requesting spouse would suffer economic hardship if relief isn’t granted. Also, lack of economic hardship won’t count against the requesting spouse.

Other changes included in the new procedure reflect the legal obligations of both spouses to pay their outstanding tax liabilities, a requesting spouse’s reasonable expectation that the nonrequesting spouse would pay the liability on time, the requesting spouse’s subsequent compliance with the tax law after relief is granted and the availability of refunds.

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