Removal of Two-Year Limit on Innocent Spouse Claims Does Not Revive Taxpayer’s Case

The U.S. District Court for the District of Massachusetts dismissed a taxpayer’s claim that she was entitled to innocent spouse relief under Notice 2011-70, which announced the removal of the two-year limitation period for claims for equitable innocent spouse relief under Sec. 6015(f) (Haag, No. 11-CV-11591-PBS (D. Mass. 8/13/12)). The notice contains a number of transitional rules that explain that the IRS would treat requests for relief differently depending on what stage a case was in when the notice was issued on July 25, 2011. As the district court noted, Notice 2011-70 treats innocent spouse claims that were adjudicated and rendered final before July 25, 2011, differently from cases that were still being litigated on that date.

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The taxpayer’s case had what the district court described as a “lengthy litigation history.” The relevant case for these purposes was Haag, No. 02-CV-12490-REK (D. Mass. 9/30/04), in which, the district court noted, a court had earlier rejected the taxpayer’s claim for innocent spouse relief. That case was final when judgment was entered against the taxpayer (and her husband) on Jan. 3, 2006.

After Notice 2011-70 was issued, the taxpayer filed suit to stop the IRS’s efforts to collect on the unpaid federal income tax liabilities relating to that suit, seeking relief from the court’s 2004 order. In Notice 2011-70, the IRS said that in cases in which an innocent spouse claim had been litigated and was final, it would not take further collection activity against the taxpayer if the IRS had stipulated in the court proceeding that the taxpayer’s request for innocent spouse relief would have been granted if the request had been timely under the old two-year limitation period.

However, in a related case (Haag, 683 F.3d 26 (1st Cir. 2012)), the First Circuit held that Notice 2011-70 would not apply to the taxpayer, even if her claim was not barred by res judicata, because the IRS failed to stipulate that the two-year deadline was the only obstacle to her claim. The IRS had, in fact, said that her claim was barred because she failed to raise it at the administrative level.

The plaintiff argued that her case was still in litigation when Notice 2011-70 was issued because her related First Circuit case was underway on July 25, 2011. For cases in litigation, Notice 2011-70 provided that the IRS would take “appropriate action . . . consistent with the position announced in this notice.” However, the district court held that the taxpayer’s innocent spouse claim was adjudicated and rendered final by the 2004 decision—before Notice 2011-70 was issued—and therefore the notice does not apply to her case.