The Latest on IRS Innocent Spouse Requests, Appeals and Litigating in U.S. Tax Court
Did you miss the Long Island Tax Professionals Symposium? Below is a recap from one of the many stellar programs. Thanks to Hana M. Boruchov, Esq., Tenenbaum Law, P.C.; Frank Agostino, Esq., LL.M. (Taxation), Agostino & Associates, P.C.; and Noelle Geiger, Esq., Grassi & Co. for their great tips on getting innocent spouse relief for clients.
Remember the reasonable person standard. One of the chief requirements for innocent spouse relief is that the requesting spouse was unaware of the understatement of tax. The IRS looks at whether the requesting spouse had actual knowledge of the understatement, or a reasonable person under similar circumstances would have known of the understatement.
The facts and circumstances determine whether the spouse had reason to know. In determining whether the requesting spouse had reason to know of an understated tax, the IRS may consider the following:
– Requesting spouse’s level of education;
– Non-requesting spouse’s deceitfulness;
– Requesting spouse’s involvement in the business of the household finances;
– Requesting spouse’s level of financial sophistication;
– Lavish or unusual changes in spending habits compared to past levels.
Other types of relief may be available. If the IRS denies the request for innocent spouse relief, the requesting spouse can appeal in designated situations or seek other relief such as:
– Separation of Liability relief, which allows for a separate allocation of additional tax owed, so the requesting spouse is responsible for his or her portion only.
– Equitable relief, which is available in limited cases under IRC Section 6015(f) where the requesting spouse does not qualify for innocent spouse or separation of liability relief.
If you go to Tax Court, consider a Small Claims Election. A party who goes to Tax Court can make a Small Claims Election (S Case) when less than $50,000 is owed per tax year. An S case offers a streamlined process with most decisions taking several months to a year to decide. However, there is no right to appeal the decision.
Look at other options for a faster appeals process. In Regular Tax Court cases involving $50,000 or more owed per tax year, alternatives include:
A Bench Decision at the conclusion of trial where the Judge may not require post-trial legal briefs; or
S Case procedures if there is no contest of amounts over $50,000 per tax year. However, note that choosing this option means the party forfeits the right to contest amounts above the $50,000 threshold.
Tax Court will encourage settlement. Discovery and litigation may be a lengthy process, so prior to trial, the case may be sent to IRS Appeals for an opportunity for settlement with IRS counsel.
Thanks again to the panelists for their informative program. If you or one of your clients has a potential claim for innocent spouse relief, speak to a qualified attorney as soon as possible to present the best case.