Proposed Regulations Provide More Detailed Rules Governing Innocent Spouse Relief

The IRS proposed more detailed rules governing innocent spouse relief under Secs. 6015 on Wednesday (REG-134219-08).

One significant change the proposed rules make is to provide additional guidance on the application of res judicata in innocent spouse cases. The doctrine of res judicata prevents a spouse from requesting innocent spouse relief when Sec. 6015 relief was at issue in a prior court proceeding or the requesting spouse meaningfully participated in a prior proceeding in which relief under Sec. 6015 could have been raised.

Under Sec. 6015(g)(2), there is an exception to res judicata when a requesting spouse did not meaningfully participate in the prior court proceeding. The proposed rules provide guidance on what meaningful participation entails, giving a nonexclusive list of acts to be considered in making a facts-and-circumstances determination of whether the requesting spouse meaningfully participated in a prior proceeding. The rules also say that a requesting spouse will not be considered to have meaningfully participated in a prior procedure if the requesting spouse established that he or she performed the acts due to abuse by the other spouse or the other spouse maintained control over the requesting spouse, and the requesting spouse did not challenge the other spouse because of fear of retaliation.

The regulations also propose a definition of underpayment or unpaid tax under Sec. 6015(f), which provides for relief where it would be “inequitable to hold the individual liable for any unpaid tax or any deficiency.” The regulations propose that “unpaid tax” and “underpayment” would have the same meaning: On a joint return, it is the balance shown as due reduced by the tax paid with the return or on or before the due date for payment (without considering any extension of time to pay). It is determined after applying credits for withholding, estimated tax payments, payments made when requesting an extension, and other credits. Generally, if there is no unpaid tax due, no relief is available under Sec. 6015(f).

The proposed regulations provide detailed rules on credits and refunds in innocent spouse cases, explain how any credit or refund that may be available to a requesting spouse is determined, and provide for allocation of refunds in certain cases. The proposed regulations would also amend the rule for credit or refund in equitable relief cases to clarify that credits or refunds of tax are available in both underpayment and deficiency cases.

Another significant portion of the regulations expands the rule that penalties and interest are not separate items from which relief can be obtained in underpayment cases. Relief will be determined based on the amount of relief from the underpayment to which the requesting spouse is entitled. So, if a requesting spouse remains liable for a portion of the underpayment after having been granted equitable relief, the requesting spouse is not eligible for relief for the penalties and interest on that portion.

However, the proposed rules would also adopt the current IRS practice (found in Internal Revenue Manual Section 25.15.3.8.1(5)) that relief from penalties and interest may be appropriate in situations where there was an underpayment of tax on the return but subsequent payments have paid all the tax, leaving only penalty and/or interest unpaid or partially unpaid.

The proposed rules also incorporate an administrative rule that the attribution of an erroneous item follows the attribution of the underlying item that caused the increase to adjusted gross income. The rules also contain a tax benefit rule, whereby the amount of an erroneous item allocated to a requesting spouse may be increased or decreased depending upon the tax benefit to each spouse.  

Finally, the rules governing the prohibition on collection and suspension of the collection statute are revised to reflect the amendments to the law permitting the Tax Court to review innocent spouse cases where there the IRS has not determined a deficiency and suspending the limitation period when equitable relief is requested under Sec. 6015(f).

The proposed rules will apply when they are published as final in the Federal Register.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.