Proposed Rules Reset Limitation for Pursuing Equitable Innocent Spouse Relief

On Monday, the IRS issued proposed regulations under Secs. 6015(f) and 66(c) changing the deadline for taxpayers to request innocent spouse relief from joint liability (REG-132251-11). The proposed rules generally adopt new time limitation rules announced in Notice 2011-70, and, as a result, the regulations are effective the date the notice was issued—they apply to requests for relief filed on or after July 25, 2011.

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 regulation is mostly 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.

Under final regulations issued in 2002 (Regs. Sec. 1.6015-5(b)(1)), the IRS imposed a deadline of two years after the date of the IRS’s first collection activity with respect to the taxpayer for innocent spouse relief requests under Secs. 6015(f) or 66(c). That deadline, which is not specified in the statute, was subject to much litigation, and even though the IRS won some cases upholding the two-year limit, it abandoned it in 2011 with the issuance of Notice 2011-70.

Under the proposed rules, a request for relief under Sec. 6015(f) or 66(c) will be timely if it is filed within the period of limitation on the collection of tax (generally 10 years under Sec. 6502) or, if the taxpayer is seeking a credit or refund, within the Sec. 6511 limitation period (generally three years after the return was filed or two years after the date the tax was paid). The regulations permit taxpayers to request equitable relief if the Sec. 6511 limitation period is still open, even if the Sec. 6502 collection period is not open. If both periods are closed, the request for relief will not be considered because there is no enforceable tax liability and the IRS will not consider a request for relief of a tax that is not legally collectible.

One change to the regulations that does not involve equitable relief is an amendment to Prop. Regs. Sec. 1.6015-5(b)(3)(ii) clarifying that the two-year period that continues to apply to requests for relief under Sec. 6015(b) or (c) is measured from the mailing date that a collection due process notice is sent by certified mail to the taxpayer’s last known address, regardless of whether the taxpayer actually receives the notice.

The proposed regulations also provide guidance on a number of other points. The proposed regulations prohibit premature requests for innocent spouse relief before a taxpayer has received notice of an examination or a letter indicating that there may be an outstanding tax liability (except where a taxpayer requests relief for a liability that was properly reported on a joint federal income tax return but not paid).

In addition, they allow a taxpayer who receives a final administrative determination denying innocent spouse relief to seek reconsideration of the request for relief if the taxpayer submits new facts, evidence, and arguments. However, the proposed regulations state that a reconsideration of the final administrative determination is not reviewable in Tax Court.

Finally, the new rules update the existing examples in the regulations to reflect all of these changes.