Monday, July 9, 2007

Tax Help: Innocent Spouse New Form 8857 - IRSNews Release IR 2007-125 , July 6, 2007.

The IRS has released a revised Form 8857, Request for Innocent Spouse Relief. The new form will ask for more information early in the process, eliminating the need for follow-up letters requesting further information. The revisions will result in faster determinations and lower government costs. The new form will also be easier to understand and will educate taxpayers about the innocent spouse relief process. The revisions were based on suggestions from a team lead by the Office of Taxpayer Burden Reduction.

WASHINGTON --The Internal Revenue Service today announced a redesigned Form 8857, Request for Innocent Spouse Relief, that will help reduce follow up questions and reduce the burden on taxpayers.

The form will ask more questions initially, but collecting critical information early in the process will mean faster processing of the request. The new design will eliminate an estimated 30,000 follow-up letters annually. The result will be a reduced burden and quicker answer for taxpayers and less cost for the government.

The form was revised based on suggestions from an IRS process improvement team led by the Office of Taxpayer Burden Reduction. The new Form 8857 is available on the Web site.

When a taxpayer files a joint return, both spouses are jointly and individually responsible for the tax. Innocent Spouse relief provides an opportunity for a spouse to be relieved from the joint debt under certain circumstances. If one taxpayer believes that only his or her spouse or former spouse who should be responsible for the tax, the taxpayer can request relief from the tax liability.

The redesigned form also will be easier to understand and to complete and will help educate taxpayers about the process. Previously, the questionnaire was separate from the form. A line-by-line analysis also resulted in a reduction in the number of questions asked of taxpayers.
For married taxpayers, joint and several liability is the obligation that accompanies the privilege of filing a joint return. Thus, one spouse may be subject to joint liability for the omissions from income or erroneous deductions of the other spouse. In some cases, one spouse intentionally has not reported income or has claimed false deductions and concealed the return errors from the other spouse. The question then becomes whether the innocent spouse, who merely signed a joint return, should be held liable for errors on the return attributable to the actions of the other spouse. The answer is especially critical if the couple has divorced and the innocent spouse is the only source of collection for the unpaid tax. However, once a joint liability has been reduced to a closing agreement with the IRS, executed by both spouses, innocent spouse relief is unavailable (Reg. §1.6015-1(c)).

Code Sec. 6015 offers conditional relief to an innocent spouse. Enacted by the IRS Restructuring and Reform Act of 1998 (P.L. 105-206), it replaced Code Sec. 6013(e), which was enacted in 1971 (P.L. 91-679) in response to judicial pleas for statutory language enabling relief from liability in situations where the result of joint and several liability was particularly harsh and inequitable. The rules for granting relief were amended by the Tax Reform Act of 1984 (P.L. 98-369), but the crucial elements necessary to obtain relief under current law are similar in many respects to those contained in the original rule. For that reason, pre-1998 case law cannot be disregarded in attempting to interpret the scope of the present language of Code Sec. 6015.

A spouse may qualify for relief from joint and several liability under Code Sec. 6015 if:
(1) a joint return has been made for the tax year;

(2) on the return there is an understatement of tax attributable to erroneous items of one of the individuals filing the joint return;

(3) the innocent spouse establishes that in signing the return he or she did not know or have reason to know of the understatement;

(4) under all the facts and circumstances, it would be inequitable to hold the innocent spouse liable for the deficiency in tax resulting from the substantial understatement; and

(5) the other individual properly elects this relief within two years after the date the IRS has begun collection activities with respect to the individual making the election (see Code Sec. 6015(b) and Reg. §1.6015-2(a)).

Failing to establish any one of these requirements generally prevents a spouse from qualifying for relief. If a spouse qualifies, relief extends to the tax (including interest, penalties and other amounts) attributable to the understatement.

However, even if these requirements cannot be satisfied, a spouse has two other avenues of relief:
Elect separation of liability (Code Sec. 6015(c) or

Request equitable relief (Code Sec. 6015(f).

While a requesting spouse may qualify for relief under Code Sec. 6015(b) (innocent spouse relief), Code Sec. 6015(c) (separation of liability), or Code Sec. 6015(f) (equitable relief), relief under (b) and (c) must be specifically elected by the requesting spouse. If the requesting spouse only seeks equitable relief under Code Sec. 6015(f), the IRS cannot grant relief under either (b) or (c). However, if it is determined that the requesting spouse would be eligible for innocent spouse relief or separation of liability, then the IRS will contact the requesting spouse to see if he or she wishes to amend the claim for relief to affirmatively seek relief under Code Sec. 6015(b) or Code Sec. 6015(c). For purposes of determining timeliness of the claim, the amended claim will relate back to the time of the filing of the original claim (Reg. §1.6015-1(a)(2)).

Although Code Sec. 6015 continues many rules contained in former Code Sec. 6013(e), it also contains significant provisions designed to protect married taxpayers from the tax misdeeds of their spouses.

Innocent spouse relief is available on an apportioned basis.

The IRS has initiated a series of steps to protect victims of domestic violence who apply for innocent spouse relief. Taxpayers who are victims of domestic violence and fear that filing a claim for innocent spouse relief would result in retaliation should write the term "Potential Domestic Abuse Case" on the top of their Form 8857, Request for Innocent Spouse Relief. Taxpayers should also explain their concerns in a statement attached to the form, in addition to explaining why they should qualify for innocent spouse relief. These steps will alert the IRS as to the sensitivity of the taxpayer's situation and the information provided. IRS employees working innocent spouse cases will receive special training on how to properly handle abuse cases (Internal Revenue News Release IR-2001-23, February 20, 2001).

The IRS is authorized to provide equitable innocent spouse relief to spouses in community property states who do not file joint returns.

Divorced or widowed taxpayers, and married taxpayers who are legally separated or who have been living apart for at least one year are permitted to elect separate tax liability despite having filed a joint return.

The Tax Court is given jurisdiction to review denials of innocent spouse relief and separate liability elections and restrains IRS collection efforts while a Tax Court procedure is pending (see ¶35,192.028).

In order to make married taxpayers more aware of the legal consequences of filing a joint return, the IRS is required to notify joint filers of their joint and several liability and send any notice relating to a joint return separately to each individual on the return.

Effective date. The provisions in Code Sec. 6015 apply to any tax liability arising after July 22, 1998 and any tax liability arising on or before July 22, 1998 remaining unpaid as of that date (Act Sec. 3201(g)(1) of the IRS Restructuring and Reform Act of 1998 (P.L. 105-206)).

Election of innocent spouse treatment under the 1998 Act is available for any tax liabilities remaining unpaid as of July 22, 1998, even liabilities arising from a court decision. The Second Circuit vacated a Tax Court decision that had denied innocent spouse relief for a capital loss carryover deduction because the deduction was not grossly erroneous as required by former Code Sec. 6013(e)(2) (P. Friedman, CA-2, 98-2 USTC ¶50,717, at ¶35,192.67). The IRS conceded that the wife could elect "innocent spouse" treatment under Code Sec. 6015, because the liabilities remained unpaid.

The two-year period for electing innocent spouse relief or separate liability will not expire before the date which is two years after the date of the first collection activity after the date of enactment (Act Sec. 3201(g)(2) of P.L. 105-206).

A Taxpayer Advocate Directive addresses the abatement of any penalty accrued or assessed to taxpayers who had made claims for relief from liability under Code Secs. 6015 or Code Sec. 6013(e) prior to December 7, 1998, and whose cases were placed on suspension until procedures were provided for relief. The penalties that should be abated (1) are attributable to unpaid tax liability for which the taxpayers made a claim for relief and (2) apply to the period beginning the later of the date such claim for relief was made or July 22, 1998, and ending on March 31, 1999 (Taxpayer Advocate Directive 1998-1, March 19, 1999).

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