The difference between innocent and injured spouse can create confusion. That confusion gets illustrated in the case of Palomares v. Commissioner, T.C. Memo 2014-243 which will soon be argued before the 9th Circuit by a student at the tax clinic at Gonzaga Law School. The case illustrates something that regularly happens in innocent spouse case – the innocent spouse’s refunds get offset by the IRS to satisfy the liability of the “liable” spouse – and getting them back can prove very difficult for the innocent spouse.
For anyone unfamiliar with the innocent spouse and injured spouse provisions, I will briefly discuss the distinction between the two types of relief. Innocent spouse relief allows a spouse who has filed a joint return to obtain relief from the joint and several liability that results from filing a joint return if the spouse requesting relief meets certain criteria set out in IRC 6015(b), (c) or (f). Injured spouse relief allows a spouse who files a joint return to recover the portion of the refund resulting from that return which relates to the liability of the requesting spouse when the refund would otherwise go to satisfy a tax, or other liability subject to offset, owed solely by the other spouse. While both forms of relief result from filing a joint return, the goal of each type of relief differs and the difference can create confusion for someone who does not regularly handle these types of cases.
Ms. Palomares got confused. She needed innocent spouse relief but filed Form 8379 designed for use by injured spouses. The IRS recognized her confusion and provided her with the correct form, Form 8857. Upon receipt of the correct form, Ms. Palomares eventually filed it but the delay creates the issue in the case. The IRS determined she deserved some relief as an innocent spouse; however, the delay in filing the correct form limited that relief. After incurring the joint liability for which she sought innocent spouse relief, Ms. Palomares found that the IRS took the refunds she claimed in subsequent years in order to satisfy the unpaid liability on the joint return. In seeking innocent spouse relief, she also wanted a return of the refunds the IRS had offset against the joint liability. The issue here turns on the timing of her request for refund, which turns on whether the filing of the incorrect form nominally seeking injured spouse relief can meet the requirements of the informal claim doctrine allowing her request for relief to relate to the date of filing the injured spouse relief rather than the date of filing the correct form for innocent spouse relief.
In addition to the general confusion that exists between innocent and injured spouse relief, Ms. Palomares had the additional handicap that English was not her first language, and she spoke very little English. The years at issue for the refund are 2005 through 2008. By these years, she had separated from her husband, and she filed returns using the filing status of head of household. As mentioned above, the IRS took the refunds reflected on these returns as it should using the power of offset granted in IRC 6502. When she did not receive her refunds for 2006 and 2007, she sought assistance from the Northwest Justice legal clinic which helped her fill out the wrong form on July 1, 2008. This clinic is not a low income taxpayer clinic but a clinic providing general legal assistance. On September 24, 2008, the IRS sent her a letter with the correct form. The Court found that “She did not call or otherwise contact respondent with respect to the September 24 letter.”
Ms. Palomares’s life intervened and kept her from focusing on her taxes for almost two years. Finally, in August, 2010, she filed the Form 8857 seeking innocent spouse relief with the correct form and seeking a return of the refunds taken from her for four years. Initially, the IRS took the position that the request came too late because she sent it more than two years after collection activity had begun; however, on May 14, 2012 the IRS reversed its position regarding the two year rule and requests for relief under IRC 6015(f). The IRS granted her relief as an innocent spouse; however, it limited her refund to amounts paid within two years of the filing of the Form 8857 in 2010. She appealed arguing that the relief should date from the submission of Form 8379 and that is the issue before the court in this case.
The Tax Court found that the Form 8379 did not meet the requirements for an informal claim. The requirements for an informal claim do not come from a statute since this is an equitable remedy constructed by the courts to prevent an injustice. As the Court notes, the sufficiency of an informal claim largely turns on the facts; however, courts generally look for certain markers in deciding whether to treat something other than a formal claim for refund as an adequate informal one. The underlying principle concerns exhaustion of administrative remedy and whether the IRS had a chance to consider the request. The more the taxpayer can show that the inappropriate document filed essentially apprised the IRS of what it needed to know in order to grant a refund, the more likely the taxpayer will succeed.
The Court states that a qualifying informal claim must satisfy three requirements. It quoted from a non-precedential memo opinion to set out the requirements:
It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations applicable to refunds if (1) the writing is delivered to the Service before the expiration of the applicable period of limitations, (2) the writing in conjunction with its surrounding circumstances adequately notifies the Service that the taxpayer is claiming a refund and the basis therefor, and (3) either the Service waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the Service rejects the informal refund claim. Jackson v. Commissioner, T.C. Memo 2002-44, slip op. at 10.
The Court found that the Form 8379 meet the first test citing to Kaffenberger v. United States, 314 F.3d 944 (8th Cir. 2003). The Court found that the Form 8379 did not convey sufficient information to notify the IRS that Ms. Palomares sought relief from the liability created by the joint return with her then husband and sought a refund of amounts applied to the liability created by the joint return. The Court determined that sending her the form for innocent spouse relief amounted to guess by the IRS that she might have intended to request that relief rather than an awareness that she wanted such relief. The Form 8379 did not reference 1996, the year for which she wanted innocent spouse relief. Because it did not reference that year, the IRS lacked sufficient clues to know exactly what she wanted and to make a determination based on her Form 8379 other than that the form she sent did not work for the circumstances of her situation since she had not filed a joint return in the years to which the form related. So, the Court denied her claim for refund based on the date of filing the Form 8379.
Ms. Palomares presents sympathetic facts. She clearly did not know the difference between innocent spouse and injured spouse, and neither did the clinic that assisted her with her divorce and that helped her file the wrong form. The IRS gave her the correct form relatively quickly but she delayed filing that form because of things happening in her personal life. She appears to deserve the refunds she seeks. The case deserves watching as it heads into argument in the 9th Circuit because of the effort to expand the informal claim doctrine into an area of some confustion. If the IRS loses, it will probably do so because it was nice and sent her the innocent spouse form. The outcome turns on whether the IRS knew what she wanted to a degree that would have allowed it to make an innocent spouse determination at the time it received the injured spouse form or instead made an educated guess based on the unavailability of the relief requested on the form she submitted and the confusion surrounding these two similar but different forms of relief available to spouses.