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Equitable Relief Case Gives Relief to Spouse on Late Filing Penalties and Interest Even Though Underlying Tax Attributable to Requesting Spouse

Posted on May 5, 2016

When spouses file a joint return reflecting an underpayment of taxes, the only avenue for relief from joint and several liability is equitable relief under Section 6015(f). When is it inequitable to hold a spouse liable?

Earlier this week’s Boyle v Commissioner is an interesting example of an equitable relief case involving a taxpayer who credibly testified that his wife had deceived him into thinking that she filed a tax return and paid the tax that was due. She had done neither, and after she died her husband found out and owed back taxes, late payment and filing penalties and interest. Despite the one off feel of many of the cases, Boyle raises unusual legal issues, including whether someone can get relief from penalties and interest but not the underlying tax.

The facts from the opinion itself set the stage for the tax issue:

During 2003 and many preceding years, petitioner [Mr. Boyle] was self-employed full time in the business of selling printer cartridges. He devoted substantial time during business hours to his sales work and also had a side business refurbishing cartridges that he pursued during evening hours. Petitioner relied on his spouse, Patricia J. Boyle (Mrs. Boyle), to handle the bookkeeping for his business, including the preparation of invoices and payment of bills. Mrs. Boyle also managed the household finances, including payment of household bills. The Boyles maintained a joint checking account during 2003. Although petitioner had access to the account and made deposits into it, Mrs. Boyle managed the account, including writing all checks to cover petitioner’s business expenses and the couple’s personal expenses.

As part of her management of business and personal finances, Mrs. Boyle also assumed responsibility for having the couple’s joint Federal income tax returns prepared and for filing them. She had done so for many years prior to 2003. Mrs. Boyle would gather information for their return preparer, and then present a prepared return to petitioner for his signature. She presented petitioner with a return prepared for 2003 for his signature and advised him that she would mail it. However, Mrs. Boyle did not in fact mail the return she had petitioner sign. Respondent’s account transcript for petitioner’s 2003 taxable year does not indicate that petitioner received any notice with respect to the Boyles’ failure to file a return or pay the tax for 2003 during 2004 or 2005. As more fully discussed hereinafter, petitioner belatedly filed a 2003 return in September 2006 when he discovered, after his wife’s death, that she had not done so. The first notice petitioner received from respondent concerning any problem for his 2003 taxable year was a notice of balance due issued one month after petitioner belatedly filed a 2003 return in September 2006.

After Mr. Boyle filed the 2003 joint return as a surviving spouse in September 2006 (showing $3451 in tax due), he sought equitable relief under Section 6015(f) from only the interest and late payment and filing penalties stemming from his spouse’s failure to file the return as she had promised in 2004.

Key Issues in the Opinion

There are some key issues worth highlighting in the opinion.

First, the IRS’s factors that it uses to determine eligibility for equitable relief that it has set out in a series of revenue procedures are not binding on the Tax Court. The most recent of those procedures and the one implicated in the case is revenue Procedure 2013-34. The Tax Court has stated many times (and again in Boyle) that it “considers” the Revenue Procedure factors but ultimately it decides on a de novo basis (both scope and standard of review) on what it thinks is fair.

Second, in Boyle, IRS took the position that a taxpayer is unable to request relief with respect to interest or penalties and that equitable relief can only be requested with respect to the underpayment and not additions to tax or interest. The Tax Court has rejected that position previously (a 2008 case called Kollar v Commissioner, at least with respect to penalties) and did so again in Boyle.

Next was the Tax Court discussion of the revenue procedure’s threshold conditions for relief, namely that the underpayment at issue was due to the requesting spouse’s income. IRS argued that because the tax on the 2003 return all stemmed from Mr. Boyle’s income, the underpayment was thus attributable to him with the effect then that it was not an appropriate case for granting relief. The Tax Court disagreed on two levels. First, it noted that it was not bound to follow the IRS’s threshold conditions. Second, it noted that IRS itself has discretion to waive the attribution requirement in cases of fraud and it analogized the wife’s deceit to fraud:

We believe what transpired here is sufficiently analogous to the fraud exception that it should give rise to an exception to the attribution condition. We are satisfied that Mrs. Boyle deceived petitioner concerning whether their 2003 return had been timely filed and the tax timely paid by having him sign a completed return and representing to him that she would take care of the rest.…

Our review of the account transcript persuades us that he filed a 2003 return before respondent issued any notice to him indicating that there were any problems for the 2003 taxable year. Thus, the items for which petitioner seeks section 6015(f) relief–the additions to tax for failure to timely file and pay, and the interest accruing during the period when petitioner was unaware that a 2003 return had not been filed–are attributable to Mrs. Boyle’s deceit. Given the totality of the facts and circumstances, we conclude that the attribution condition should not bar equitable relief. [footnotes omitted]

After dispensing then with the threshold bar to relief, the Tax Court went through the revenue procedure’s factors and ultimately found that all the factors were neutral with the exception of his lack of a significant benefit and knowledge or reason to know of the underpayment. With respect to significant benefit, the Tax Court again differed with the IRS’s view if the unpaid tax is small so that neither spouse received a significant benefit from its nonpayment, then this factor is neutral. Instead, the Tax Court views the lack of significant benefit as a factor favoring relief when the unpaid amounts in question were relatively small and would have produced little benefit for either spouse (as was the case here). For more on why the Tax Court is right here and the IRS’s view is wrong see Carl Smith’s post Tax Court Again Refuses to Apply One Part of Equitable Innocent Spouse Relief Rev. Proc. 2013-34.

Conclusion: Tax Court Gives Boyle Penalty and Interest Relief

On the factors, Boyle was a close case, and while I will not discuss them here, the opinion has an interesting discussion of the other factors (all of which besides significant benefit and reason to know were neutral), including Boyle’s somewhat less than clean compliance and payment history. But at the end of the day, the Tax Court felt that the lack of benefit and more importantly the deceit that contributed to his not knowing about the unfiled return were enough to tip the scales in favor of relief, in a limited way. It relieved him of the Sections 6651(a)(1) and (2) penalties for late payment and filing. More surprising to me was it also relieved him of interest from the period up until when he found out about the 2003 tax due when he filed the return, in September of 2006, stating that it was “appropriate to relieve petitioner of the interest that accrued during the period in which he reasonably believed the 2003 tax had been paid.” Given that taxpayers have very limited avenues to have the IRS abate interest, this aspect of Boyle represents a significant taxpayer victory although in this case itself the interest liability is low.

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