On Monday, the IRS issued Rev. Proc. 2013-34, providing the rules under which taxpayers can obtain equitable innocent spouse relief from joint liability under Sec. 66(c) or 6015(f).
Married couples who file joint returns are jointly liable for their federal income tax liability, while married couples who live in community property states are jointly liable for community income regardless of how they file their returns. Innocent spouse relief takes three forms under Sec. 6015, but the one the new revenue procedure is concerned with is equitable relief under Sec. 6015(f). For taxpayers in community property states, Sec. 66(c) grants equitable relief from joint liability in certain situations.
Rev. Proc. 2013-34 adopts the procedures proposed in Notice 2012-8 with a few changes—most significant are the availability of streamlined procedures for both understatements of tax on a return and underpayments and for Sec. 66(c) relief from community income tax liability.
The three most significant parts of the final revenue procedure are (1) the availability of a streamlined procedure under which, in appropriate cases, the IRS will grant relief under this procedure, (2) a much broader view of how a requesting spouse’s being subjected to financial control or abuse affects the various prerequisites for relief, and (3) the availability of refunds in certain cases.
Streamlined determinations are available for requesting spouses who meet the initial requirements for equitable relief. The additional prerequisites for a streamlined determination are that the requesting spouse (1) is no longer married, (2) would suffer economic hardship if relief is not granted, and (3) for Sec. 6015(f) relief, did not know or have reason to know of the understatement or deficiency or the underpayment of tax, or, for Sec. 66(c) relief, did not know or have reason to know of an item of community property income properly treated as gross income that would be treated as the income of the nonrequesting spouse.
If the nonrequesting spouse maintained control of the finances and restricted the requesting spouse’s access or abused the spouse so that the requesting spouse was not able to challenge the treatment of any items, the requesting spouse will satisfy the third requirement whether or not he or she was aware of the item. (When abuse rises to the level that a spouse signed the joint return under duress, the IRS has always taken the position and takes the position in this procedure that equitable relief is not available or necessary because no joint return was filed.)
If the requesting spouse is not eligible for a streamlined determination, the spouse is still eligible to be considered for equitable relief under the normal procedures.
Abuse or Financial Control
The second major change is that the new innocent spouse determination procedure gives greater deference to the presence of abuse than prior guidance did. For example, if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information, and, because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse’s retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency. Under the prior rules of Rev. Proc. 2003-61, a requesting spouse’s knowledge of an item was a strong factor weighing against relief.
The third major provision is the availability of refunds in both understatement and underpayment cases if the requesting spouse provided the funds used and the payments were made after July 22, 1998 (the date the most recent statutory version of innocent spouse relief was enacted). Under Rev. Proc. 2003-61, the only refunds that were available were from funds paid by the requesting spouse under an installment agreement.
Statute of Limitation
The revenue procedure elaborates on the IRS’s current position, also addressed in proposed regulations (REG-132251-11) and announced in Notice 2011-70, that a spouse is not required to request relief within two years of the date the IRS began collection activities. Equitable relief must now be requested within 10 years after the tax at issue was originally assessed or, if a claim for refund is involved, within the later of the three-year period since the return was filed or the two-year period in which the tax was paid.
Rev. Proc. 2013-34 supersedes Rev. Proc. 2003-61 and is effective for requests pending on or after Sept. 13, but also can be applied to cases pending on that date, whether with the IRS, in the IRS Appeals office, or in court.