Innocent Spouse Relief: Alternatives after the Lantz Case: IRS Victory Forces CPAs, to Assess Other Relief Strategies

EXECUTIVE SUMMARY * Taxpayers may seek relief under IRC [section] 6015(b) from joint and several liability for a tax deficiency arising from a joint return, where the requesting spouse did not know, and had no reason to know, of an understatement and, taking into account all the facts and circumstances, it would be unfair to hold that spouse liable for the understatement. * In addition, section 6015(c) allows divorced and separated spouses in certain instances to seek relief from an understatement on a prior joint return. Spouses who do not qualify for either of those provisions may seek equitable relief under section 6015(f). In all these forms of innocent spouse relief, the requesting spouse must properly apply for relief within two years of when the IRS begins collection activity. The deadline for 6015(f) relief is set by regulation, while that for the other two provisions is contained within the statute. * In the U.S. Tax Court, taxpayers have successfully challenged the time limit with respect to section 6015(f) relief; however, the Seventh Circuit Court of Appeals recently upheld the IRS' authority to impose the deadline. Tax advisers can explore with their clients at least two alternative avenues of relief: requests for an extension of time to file a regulatory election under Treas. Reg. [section] 301.9100-3 and requests for a release of levy and return of property under section 6343. * Tax advisers can also educate their married individual tax clients about joint and several liability and, where appropriate, suggest filing separate rather than joint returns. ********** This past June, the Seventh Circuit Court of Appeals in Cathy M. Lantz v. Commissioner (docket no. 09-3345, 6/8/2010) reversed the Tax Court and upheld the IRS position that innocent spouses seeking equitable relief under subsection (f) of IRC [section] 6015 are subject to the same two-year filing deadline that applies to the other two types of innocent spouse claims under sections 6015(b) and (c). Subsection (f) contains no reference to a filing deadline, and Tax Court decisions have held that there is none. Taxpayers--especially those in the Seventh Circuit--who may have sought to take advantage of the Tax Court's holding in similar cases may now be looking to their CPA tax advisers to reassess their strategy. This article offers suggestions on preventing such problems and on alternative avenues of relief available to taxpayers, especially those who might have a valid innocent spouse claim except for a missed deadline. INNOCENT SPOUSE CLAIMS Spouses on a joint return are jointly and severally liable for the full amount of the tax due for the tax year. In a number of instances, One spouse (usually a financially unsophisticated person) neither knows, nor has reason to know, of inaccuracies on a return that was prepared by or under the direction of the other Spouse. Under section 6015, the innocent spouse may be provided relief from liability for tax, penalties, interest and other amounts if the spouse files a timely Form 8857, Request for Innocent Spouse Relief. Section 6015(b) provides the requirements for tax relief for an innocent spouse in the most general case: * A joint return was filed; * There is an understatement of tax on the return that is due to an erroneous item of the other spouse; * The innocent spouse signed the return and did not know, and had no reason to know, that the understated tax existed; and * Taking into account all the facts and circumstances, it would be unfair to hold the spouse liable for a resulting tax deficiency [ILLUSTRATION OMITTED] If the innocent spouse knew, or had reason to know, upon signing the return that it reflected an understatement but not its amount, partial relief may be available for the amount he or she did not know about. SEPARATION-OF-LIABILITY RELIEF An alternate form of relief is available when spouses have divorced or separated after filing a joint return. …