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New, Additional Proposed Innocent Spouse Regulations Issued (Part 1)

Posted on Nov. 24, 2015

We welcome back frequent guest blogger, Carl Smith.  Carl and four low income tax clinic directors including three current directors, Jamie Andree, Kathryn Sedo and me, coauthored comments to the innocent regulations which we submitted in January of 2014.  We were late in submitting the comments but the IRS was nice about letting us submit them after the deadline.  The proposed regulations have finally arrived.  As Carl discusses, they do some good things and they fail to do some things we requested.  Because of the history behind these regulations, Carl breaks his comments into a two part post.  Today’s post will set the scene and tomorrow’s post will analyze the proposed regulations.  Keith

On November 20, the Treasury published a set of proposed regulations under sections 66 and 6015. Section 6015 is the innocent spouse relief provision with respect to liability from joint income tax returns. Section 66(c) is a similar provision, dealing with relief from income tax deficiencies on married filing separate returns that arise from a spouse’s failure to report half of community income received by the other spouse in community property states. The proposed changes to the section 66(c) regulations are minor, and I will not discuss them further. However, the proposed changes to the section 6015 regulations are significant – both in what they do and what they do not do.

These new proposed regulations supplement, but do not retract, other proposed regulations under these sections that were promulgated in 2013.  While the new proposed regulations are intended to deal with different issues than the 2013 proposed regulations, in some cases, the new proposed regulations necessarily overlap with the 2013 proposed regulations.  Unfortunately, where the overlap occurs, and where the 2013 proposed regulations had elicited critical comments, the new proposed regulations neither reflect nor respond to those prior comments.

The new proposed regulations largely do four things:  (1) make changes necessary to conform the existing regulations to the 2006 statutory amendments to subsection (e) concerning subsection (f) equitable relief, (2) adopt positions previously taken by the IRS in Rev. Proc. 2013-34, 2013-2 C.B. 397, that expanded the instances in which a requesting spouse could get a refund from post-return payments applied to the liability, (3) provide detailed new rules and examples concerning when a spouse, under section 6015(g)(2), “participated meaningfully” in a prior litigation such that the spouse is precluded by res judicata from later relitigating the right to section 6015 relief, and (4) provide detailed rules and examples concerning allocation of deficiencies among spouses in situations where one spouse’s unreported income or improper deductions changed adjusted gross income such that a portion of the deficiency is attributable to a phase-out of tax benefits on the return.

This is a two-part post. Today, I will give the long, tortuous background that has led up to these new proposed regulations. In the second part of the post, I will discuss the actual proposed changes and note some requested changes that were not made.


Current regulations under sections 66(c) and 6015 were promulgated in 2003 and 2002, respectively. With respect to section 6015 relief, two very important things have transpired since 2002 that required changing the regulations:

First, there was the issue of whether a Tax Court stand-alone innocent spouse case at section 6015(e) could include a determination of equitable relief under subsection (f). After the Tax Court held that it could consider subsection (f) relief in such a suit in Ewing v. Commissioner, 122 T.C. 32 (2004), the Ninth Circuit reversed this holding at 439 F.3d 1009 (9th Cir. 2006). The Eighth Circuit then agreed with the Ninth Circuit in Bartman v. Commissioner, 446 F.3d 785 (8th Cir. 2006), and the Tax Court changed its position to follow the two appellate courts in Billings v. Commissioner, 127 T.C. 7 (2006).

These rulings displeased Congress, which in December 2006 amended section 6015(e) both (1) to provide that subsection (f) relief can be considered in a subsection (e) stand-alone Tax Court innocent spouse case and (2) to provide that a request for subsection (f) relief prevents the IRS from collecting the liability while the relief request (and any ensuing Tax Court suit) is pending and tolls the collection statute of limitations during that same period. The collection prevention and statute tolling provisions in subsection (e) prior to that amendment applied only in the case of taxpayers electing relief under subsections (b) (regular deficiency relief) or (c) (separation of liability relief as to divorced or separated spouses), not those (such as all taxpayers with underpayments) merely requesting relief under subsection (f). The existing 2002 regulations have never been fixed to reflect this 2006 statutory amendment.

Second, existing Reg. 1.6015-5(b)(1) provides that persons who “elect” relief under subsections (b) or (c) or “request” relief under subsection (f) must do so within 2 years after the commencement of collection activities. After the Tax Court declared that regulation invalid as applied to taxpayers requesting relief under subsection (f) in Lantz v. Commissioner, 13 T.C. 131 (2009), the Seventh Circuit reversed the Tax Court and upheld the validity of the regulation at 607 F.3d 439 (7th Cir. 2010). In early 2011, two other Circuits agreed with the Seventh Circuit.   Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011); Jones v. Commissioner, 642 F.3d 459 (4th Cir. 2011). This brought a storm of protest from many members of Congress, who believed that a spouse should be able to request subsection (f) relief at any time while the collection statute of limitations is open. Bowing to the Congressional pressure, the IRS issued Notice 2011-70, providing that the IRS would not enforce the 2-year regulation’s time limit to claim subsection (f) relief and that subsection (f) relief could be requested at any time when either the statute of limitations on collection under section 6502 remained open or the statute of limitations on refund claims under section 6511 remained open.

The controversy over the 2-year election regulation sparked the IRS to reconsider whether it could make relief under subsection (f) easier to obtain. In 2011, the substantive grounds and procedures for electing section 66(c) and 6015(f) equitable relief were set out in Rev. Proc. 2003-61, 2003-2 C.B. 296. At Notice 2012-8, 2012-4 I.R.B. 309, the IRS sent out for public comment a proposed Revenue Procedure to replace Rev. Proc. 2003-61 and liberalize some of its relief provisions. The IRS received extensive comments from the low-income taxpayer clinic (LITC) community on the proposed Rev. Proc. Unfortunately, most of those comments were not incorporated in the ensuing replacement, Rev. Proc. 2013-34, but some were, at least in part.

2013 Proposed Regulations

Around the same time that it issued Rev. Proc. 2013-34, the IRS issued proposed regulations (at REG-132251-11, 78 Fed. Reg. 49242) primarily to update Reg. 1.6015-5 to incorporate the Notice 2011-70 position that subsection (f) relief could be requested at any time when either the statute of limitations on collection under section 6502 remained open or the statute of limitations on refund claims under section 6511 remained open. The proposed regulation also did two other things:

First, it provided for an innocent spouse relief audit reconsideration process. Under the regulations, with one rare minor exception that I won’t get into, a taxpayer can only file one Form 8857 – the form by which a taxpayer requests or elects any relief under sections 66 and 6015. The audit reconsideration process is designed for taxpayers to be able to bring to the IRS’ attention significant changes in the factors that go into equitable relief that happened after the IRS’ previous notice of determination denied relief (e.g., changes in marital status, financial hardship, health, and/or abuse). Under the 2013 proposed regulations, the reconsideration request is not considered an election of section 6015(b) or (c) relief or a request for section 6015(f) relief, so any adverse ruling on audit reconsideration may not be appealed to the Tax Court under subsection (e).

Second, the 2013 proposed regulations provided additional detail on what constitutes collection activity for purposes of the 2-year election period that still applies to subsection (b) and (c) relief. Among its new rules was an adoption of the Tax Court’s holding in Mannella v. Commissioner, 132 T.C. 196 (2009), that the issuance of a notice of intention to levy to the taxpayer’s last known address constitutes collection activity that commences the 2-year election period running — even though the taxpayer never actually receives the notice. In Mannella, the taxpayer’s ex-husband was willing to testify that he hid the notice from the taxpayer.

Again, the LITC community made extensive comments on the 2013 proposed regulations that Tax Notes Today published. To date, no final regulations have been issued with respect to the 2013 notice of proposed rulemaking.

In part 2 of this post, I will discuss the actual proposed changes made by the new proposed regulations and note some requested changes that were, sadly, not made.

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