In response to court decisions and the IRS’ claim that its experience applying equitable relief has given it new insight, the IRS issued a proposed revenue procedure changing the way it will treat requests for equitable innocent spouse relief under Secs. 66(c) and 6015(f) (Notice 2012-8). The three most significant changes in the proposed revenue procedure are (1) the availability of a streamlined procedure under which, in appropriate cases, the IRS will grant relief in “the initial stage of the administrative process” (which the notice does not define), (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.
The new proposed revenue procedure, which will supersede Rev. Proc. 2003-61 when it is finalized, can be applied immediately, although until the revenue procedure is finalized (after a comment period on the proposed rules), requesting spouses can, if they prefer, request the IRS to apply the current rules, as set out in Rev. Proc. 2003-61.
The initial requirements for equitable relief are generally unchanged from Rev. Proc. 2003-61, except for a change to the time limitation (discussed below), a change from not having filed a fraudulent return to not having knowingly filed a fraudulent return, and the addition of a provision permitting the requesting spouse to request relief for items attributable to the requesting spouse if he or she can prove that the nonrequesting spouse’s fraud was the cause of the understatement or deficiency.
Under the new procedures, 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) did not know or have reason to know of the understatement or deficiency or the underpayment of tax.
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 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 to the proposed rules is the addition of the nonrequesting spouse’s abuse or intimidation of the requesting spouse as a reason that the requesting spouse feared to question any item on the return. Under Rev. Proc. 2003-61, a requesting spouse’s knowledge of an item was a strong factor weighing against relief, and although the nonrequesting spouse’s “deceit or evasiveness” was a factor in favor of relief, it was not decisive. The proposed rules add the nonrequesting spouse’s abuse or attempt to control the requesting spouse to every part of the requirements where knowledge of an item is at issue in whether relief is available.
The third major change 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 proposed revenue procedure also elaborates on the IRS’ new position, announced in Notice 2011-70, that the requirement that a spouse request relief within two years of the date the IRS began collection activities will no longer apply to claims for equitable relief. 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.