Friday, July 29, 2011
IRS Removes Two-Year Limit On Innocent Spouse Claims
The IRS has reversed its position on granting innocent spouse relief.
The concept of innocent spouse requires that the spouses file a joint return. The problem with a joint return is the joint liability, which means that one or both parties can be held responsible, in part or in full, for any liability. What happens when the spouses file a joint return showing a liability and one spouse believes that the tax has been “resolved” – and believes this both in error and to his/her disadvantage? What if the spouses are later separated or divorced? What if one spouse is in jail? What if one spouse died?
The effect of joint liability can be harsh, so the IRS Code allows an escape hatch for innocent spouses.
There are three types of innocent spouse provisions in the Code. Two types require the spouse to file the claim within two years of IRS notification. The third type does not contain this provision, but the IRS has construed the provision as containing the wisp of a dim shadow of Congressional intent to include a two-year provision. With that divination, the IRS has been disallowing innocent spouse claims filed later than two years for all three types of innocent spouse claims.
Doesn’t sound like much, but think about an example. A husband abuses his wife. He certainly is not keeping her informed about tax notices. She knows zip about the taxes other than signing the return at his behest. She finally leaves the fool. She does so however after two years of first IRS contact, not that she would know about it. Previously the IRS would have said that she was out of luck.
Well, a number of people thought this was unconscionable, including the IRS National Taxpayer Advocate, many practitioners and members of Congress. The IRS has finally relented and removed the two-year requirement from “type three” of innocent spouse. For those who follow the tax literature, the change was published in Notice 2001-70.
I have done innocent spouse claims. I am happy with this change.