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IRS lifts two-year limit on ‘innocent spouse’ relief

The Internal Revenue Service has eliminated the two-year limit on taxpayers seeking relief from a spouse’s understated or underpaid income tax liability.

“In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief,” said IRS Commissioner Doug Shulman in a statement. “This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers.”

Under 26 U.S.C. §6015(f), an “innocent spouse” is entitled to relief from liability resulting from a jointly filed federal income tax return. A Treasury Department regulation sets a two-year deadline for a taxpayer to file for innocent spouse relief under §6015(f).

Under the rule, the limitation period begins to run when the IRS commences collection activities. The rule has been upheld in decisions earlier this year from the 3rd Circuit and the U.S. Tax Court.

However, at the same time that the rule was being upheld in court, the IRS launched a “thorough” review of the equitable relief provisions of the innocent spouse program and concluded that a change was in order to avoid the victimization of unwary spouses.

“We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future,” Shulman said in his statement.

The IRS will no longer apply the two-year limit to either new equitable relief requests or requests currently being considered by the agency.

The IRS notice outlining the policy change explains that a taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the benefit of the new rule and should not reapply.

In addition, the IRS will not apply the two-year limit in any pending litigation involving equitable relief. Where litigation is final, the agency said it will suspend collection action under certain circumstances.

The agency recently released further guidance on the policy change, and said it plans to issue regulations formally removing the time limit.

Lawyers USA is a sister publication of The Daily Record.