IRS Relents on Two-Year Limit on Innocent Spouse Equitable Relief

After winning appeals in three federal circuit courts of its two-year limit for requesting equitable innocent spouse relief, the IRS said on July 25 it will no longer observe that deadline.

In Notice 2011-70, the IRS said it will now consider taxpayer requests for equitable relief from joint and several liability under Sec. 6015(f) at any time if the limitation period for collection of taxes under Sec. 6502 remains open for the tax years at issue (generally, 10 years after an assessment). If the taxpayer is seeking a refund as part of the request, the limitation period on credits or refunds under Sec. 6511 governs (generally, three years).

In a number of cases, taxpayers have been denied equitable innocent spouse relief solely because the request was not timely. The Tax Court has declared the two-year limit, imposed by Regs. Sec. 1.6015(f)-5(b)(1), invalid, but the Seventh, Third and, most recently, the Fourth Circuit Courts of Appeals have overruled the Tax Court and upheld the IRS’ authority to impose the two-year limit (respectively, Lantz, 607 F.3d 479; Mannella, 631 F.3d 115; and Jones, 642 F.3d 459). In April 2011, members of Congress wrote IRS Commissioner Doug Shulman to urge the Service to revise the regulation.

On July 25, the IRS said it will do just that. In the interim, until the regulations are revised and the limit is formally removed, the IRS provided transitional rules for requesting relief or resolving cases currently in litigation.

Requests Pending with the IRS

For requests already submitted (normally, by filing Form 8857, Request for Innocent Spouse Relief) but not yet ruled upon by the Service, taxpayers should not reapply. The IRS will consider the request even if it was submitted more than two years after the first collection activity was undertaken, if it is within the other applicable limitation periods noted.

Requests Denied Solely for Untimeliness

Taxpayers may reapply for equitable relief if their requests were denied solely because they made the request more than two years after the first collection activity and the case has not been litigated. If the request involves a claim for refund or credit, the IRS will use the date of the original request for that purpose.

Requests in Litigation

For cases currently before a court, the government will “take appropriate action consistent with the position” announced in the notice regarding any issues of timely filing of a request under Sec. 6015(f).

Requests for Which Litigation Is Final

If, in a court case that is final, the IRS stipulated that a request for relief under Sec. 6015(f) would have been granted except for the timely submission issue, the IRS will take no further collection activity after July 25, 2011, the effective date of the notice. No refunds or credits are available, however, for previous collections.

Future Requests

Requests for equitable relief under Sec. 6015(f) filed after July 25 will be considered consistent with the other limitation periods noted above but without regard to when collection activity began.