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IRS Expands Equitable Relief for Innocent Spouses

Earlier today, the IRS announced its withdrawal from imposing the two-year statute of limitations for filing a claim for equitable relief under the innocent spouse statute. This is big news, and great for taxpayers.

Under the Internal Revenue Code, married taxpayers have the option of filing either a joint tax return or separate tax returns. Although there may be some advantages to filing jointly, one disadvantage is that both spouses are jointly and severally liable for any tax liability that arises from their filings and returns.

In 1998, Congress enacted the “Innocent Spouse Relief” statute in order for qualifying spouses who filed jointly to avoid collection action on the liability. For two of the three possible avenues for relief, the Internal Revenue Code requires the taxpayer to file a claim for relief within two years after the IRS commences collection activity. These two avenues are:

  • 1) A joint filer who did not know or have reason to know that there was an understatement on the tax return (IRC section 6015(b));
  • 2) A joint filer who was legally separated or no longer married, unless the IRS shows that the would-be innocent spouse had actual knowledge of any item giving rise to the deficiency (IRC section 6015(c)).

The third avenue, found in IRC section 6015(f), authorizes granting innocent spouse relief when holding otherwise would be “inequitable.” While the statute does not impose the same two-year limit on the equitable relief provision, the Secretary of the Treasury promulgated a regulation imposing it. And taxpayers have lost in court challenging the validity of the regulation, thus generating controversy by failing to provide relief the statute was intended for.

Recognizing the many innocent spouse victims who would be entitled to equitable relief but for the imposition of the two year rule, the IRS has issued Notice 2011-70, which revokes the two-year rule for filing a request for equitable relief, effective immediately. In fact, taxpayers who were previously denied relief solely due to the two-year window can refile a request for relief.

For at least today, the taxpayer wins.

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