Is the Tax Court Becoming a Divorce Court? the Answer Could Change How the Innocent Spouse Rules Are Interpreted

EXECUTIVE SUMMARY * THE IRS WORKLOAD IS INCREASING AS A RESULT OF MORE innocent spouse claims. A 1998 change in the law is also bringing more work to the Tax Court, which is considering a wide range of domestic issues that previously were the purview of the divorce courts. * THE 1998 INNOCENT SPOUSE LAW MAKES IT EASIER for an innocent spouse who files a joint return to avoid responsibility for the total tax on the return. IRC section 6015 provides for Tax Court jurisdiction in innocent spouse cases, although the IRS disagrees with the extent of this jurisdiction. * A JOINT RETURN IS TYPICALLY REQUIRED TO BE eligible for innocent spouse relief. Sections 6015(b) and 6015(c) specifically require it. In Raymond, the Tax Court found that a joint return was required for all 6015 claims, even though section 6015(f) does not explicitly require one. Wenner suggests to CPAs the Tax Court is willing to consider section 6015(f) equity claims without accompanying 6015(b) and 6015(c) elections. * FOLLOWING TAX COURT ACTION IN BUTLER AND in Fernandez, the IRS acquiesced in the latter case and said it would not object to Tax Court review of IRS equitable relief decisions under section 6015(f). * CPAs HAVE AN INCREASING NUMBER OF WAYS to help clients get relief under section 6015. The Tax Court can review section 6015 claims as part of collection due-process procedures under 6320 involving tax lien notices and 6330 involving tax levies. * THE TAX COURT'S MEDIATION ROLE IN INNOCENT SPOUSE claims is likely to grow more if the IRS considers refund claim cases and as practitioners become more familiar with the requirements. The IRS is experiencing a dramatic workload increase as more and more taxpayers claim innocent spouse relief to avoid on a joint tax return. For 1999 to 2001, it received a staggering 152,942 relief requests, and in 2001, the average claim processing time was 363 days. The increase in claims has also resulted in more litigation. In fact, Tax Court cases interpreting the 1998 innocent spouse law revision have expanded the court's jurisdiction. The court now considers a wide range of domestic issues that typically were within the purview of divorce courts. To help CPAs better advise spouses seeking relief, this article reviews the innocent spouse rules and some of the many Tax Court cases that have resulted. THE INNOCENT SPOUSE LAW The 1998 Internal Revenue Service and Reform Act made it easier for an innocent spouse who signed a joint return to avoid responsibility for the total tax due. The law covers federal income and self-employment taxes including penalties, additions to tax and interest. Employment taxes on household employees are not eligible. Because the IRS was swamped by relief requests even before it took any action to collect a tax, the agency now accepts requests only after a taxpayer receives notice of an audit or other notification of a potential liability. A taxpayer must file a relief request no later than two years after collection begins. If the IRS denies the request, the taxpayer has 90 days to petition the Tax Court. The 1998 law replaced and expanded former section 6013(e), making partial relief possible. Section 6013(e) previously covered only substantial understatements attributable to grossly erroneous items; section 6015(b) now covers any understatement. In addition, the new law expanded innocent spouse relief by adding a separation of liability remedy and equitable relief. CPAs should be aware of these provisions of the act: * IRC section 6015(b), innocent spouse relief. Provides that a spouse will be relieved of an understated tax on a joint return (but not a tax underpayment) when he or she did not know or have reason to know of the understatement and it would be inequitable to hold the spouse responsible. An understatement occurs when income is omitted or expenses are overstated, resulting in a reported tax that is less than actually owed. …