The IRS last week came forth with a proposal for regulation [Reg 132251-11] to extend the deadline for Innocent Spouse Relief, in regards to equitable relief requests, from 2 years to 10 years from the first collection activity. It also intends to stop collection activities for equitable relief applications being processed. This is not a change to the “Separation of Liability” relief request or the Innocent Spouse relief request, but only a modification to one of the forms of joint and several liability tax relief with the IRS (explained below).
A Little Background
In 2011, the Seventh Circuit Court of Appeals ruled with the IRS on a time limit on filing for equitable relief was 2 years. The ruling resulted in a reasonable time frame as being defined as a time limit of 2 years for the date the IRS begins trying to collect. This time limit is widely accepted as law even though the case legally didn’t apply to all circuits. However, the IRS later responded that it would look at ISR requests past 2 years, but did not provide an actual time deadline.
This latest ruling if published in the Federal Register, will allow taxpayers to file for Innocent Spouse Relief up to 10 years from the state of collection activities under Section 6015(c). This ruling provides relief from not only only joint and several tax liability but also relief for those live in states with community property laws (under section 66). The proposed regulations would apply retroactively to any request filed after July 25th, 2011.
It is important to note that the 2 year statute still applies to “Separation of Liability Relief” and “Innocent Spouse Relief” filings.
What is Innocent Spouse Relief?
When a married couple files a joint tax return, they IRS holds each spouse equally responsible by way of joint and several liability. This means that the IRS can collect the total outstanding tax liability including penalties and interest from either spouse even if a divorce decree states one spouse is solely responsible. Many American taxpayers, especially women, are held responsible for their spouse’s or ex-spouse’s tax mistakes when they file jointly. In many cases, one spouse is unaware of any tax liabilities or tax mishaps until after a divorce is finalized and they start to receive outstanding tax balance notices from the IRS or state tax departments.
This is where an IRS resolution mechanism called “Innocent Spouse Relief” can provide true tax relief to individuals who were once married and are unjustly being held responsible for their ex-spouse own doings. There are three types of relief from “joint and several” liability.
- Innocent Spouse Relief – provides relief if the ex-spouse does not report certain income or tax credits or deductions are incorrectly claimed.
- Equitable Relief – applicable when a taxpayer does not qualify for the other two forms with item(s) not reported correctly on a joint tax return and generally attributed to your spouse. You can also qualify for this relief if you simply have unpaid taxes, but tax returns filed correctly.
- Separation of Liability Relief – Provides a way for the taxpayer to allocate taxes owed to a former spouse (or spouse if separated) for items not reported correctly on a joint tax return. Any taxes allocated to the taxpayer requesting relief, is still responsible for the taxes.
As you can see, the IRS’s recent proposal applies to only “equitable relief requests.” Moreover, any refund or overpayment requests with an innocent spouse relief request still adheres to the refund statue of limitations.