On September 13th the IRS issued a new revenue procedure that significantly changes equitable innocent spouse relief. I wrote an article that was published Tuesday in the Texas Bar Association’s Texas Tax Lawyer .
Change #1: Greater deference is given to the presence of abuse than Rev. Proc. 2003-61. Existence of abuse can outweigh or negate other factors.
Change #2: Request for equitable relief can be filed any time before the collection statute runs out. Previously, the rule was that relief had to be requested within 2 years of collection action. This change actually happened in 2011 (IRS Notice 2011-70).
Change #3: Threshold conditions previously required that the income tax liability must be attributable to the non-requesting spouse. New exception exists if the item stems from the nonrequesting spouse’s fraud and thus gave rise to the understatements of tax.
Change #4: Streamlined determinations now apply to understatements of tax, underpayments of tax and claims for equitable relief under IRC § 66(c).
Change #5: No one factor or majority of factors controls a determination – it all depends on the facts and circumstances.
Change #6: Standards for economic hardship are revised. A lack of economic hardship will now be viewed as a neutral factor.
Change #7: A finding of actual knowledge of an item giving rise to an understatement will no longer be weighed more heavily than other factors. Abuse or financial control by nonrequesting spouse causing fear of retaliation will result in the knowledge factor to weigh in favor of relief.
Change #8: Similar to change #7 above, in a situation where the spouse had knowledge that nonrequesting spouse would not pay liability within a reasonably prompt time frame, the existence of abuse or financial control causing a fear of retaliation will cause this factor to weigh in favor of relief.
Change #9: IRS clarifies that the legal obligation of the requesting spouse is a consideration (not just whether the non-requesting spouse has an obligation to make payment to the IRS).
Change #10: The significant benefit factor will not weigh against relief if the nonrequesting spouse abused or maintained financial control over the nonrequesting spouse and the nonrequesting spouse made the decisions about living a more lavish lifestyle.
Change #11: Subsequent compliance with income tax laws will now weigh in favor of relief, instead of just being viewed as a neutral factor.
Change #12: Refunds are now available in deficiency cases for payments made other than through an installment agreement.