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Special Statute of Limitations for Injured Spouse Relief

Posted on Sep. 2, 2016

On May 19, 2016, the Treasury Inspector General for Tax Administration issued a report entitled “Injured Spouse Cases Were Not Always Timely Resolved, Resulting in the Unnecessary Payment of Interest.”  We have not written much about injured spouse relief.  So, I thought the report might provide a good opportunity for discussing this distant but often confused cousin of innocent spouse relief.  I previously wrote about this topic in connection with individuals filing bankruptcy.

Innocent spouse relief, the better known spousal relief provision allows one spouse to remove all or part of a joint liability created as a result of a valid joint return because the requesting spouse meets the criteria set for in IRC 6015(b), (c) or (f). Injured spouse relief does not relieve the injured spouse of the joint liability on the return but allows the requesting spouse to obtain the return of the portion of the joint refund taken to offset a debt of the non-requesting spouse.  The injured spouse will have contributed some portion of the payment of the tax through withholding or estimated payments which the IRS will use to satisfy a pre-existing debt of the other spouse for federal taxes or some other debt allowed under the offset rules of IRC 6402.

For example, Harry and Sally file a joint return. Harry has a child support obligation that pre-dates his marriage to Sally and some of the child support remains unpaid.  The child support agency properly certifies the debt to the IRS and the IRS computer is posed to offset any refund due to Harry.  Harry and Sally file a joint return.  Harry did not work that year but was a stay at home dad.  Sally made $100,000, creating a tax liability of $15,000 on their joint return and she had withholding of $21,000.  The IRS will take the $6,000 refund and use it to pay Harry’s child support obligation from his prior marriage.  This may cause marital friction between Harry and Sally.  The injured spouse provisions allow Sally to obtain a return of the money she paid into the IRS, here the entire $6,000, and to reduce the marital friction.  Sounds simple and easy but you know that things do not always work out that way and TIGTA studied the process to see where the pressure points might be.  In reading their study, I learned an unusual fact about the statute of limitations for claiming injured spouse status.

The TIGTA report states that a spouse can qualify for injured spouse status if that person is not required to pay the past due amount that the IRS offsets under IRC 6402 and meets any of the following criteria:

  • The injured spouse made and reported tax payments (e.g., Federal income tax withholdings from his or her wages or estimated tax payments).
  • The injured spouse had earned income (e.g. wages, salaries, or self-employment income and claimed the earned income credit or the additional child tax credit.
  • The injured spouse claimed a refundable tax credit, such as the premium tax credit or the refundable credit for prior year minimum tax.

When someone believes they qualify for injured spouse status, they should attach a Form 8379 to their tax return. Of course, a spouse may not know that their partner has a debt which will cause an offset of refund on the joint return and may not know that they should proactively file the Form 8379 to avoid the problem.  Sometimes, the failure to know this and the delivery of the news in the form of an IRS notice explaining where the refund went can cause confusion for the unrepresented taxpayer who will not always know about the ability to claim injured spouse relief.  When the Form 8379 does not accompany the return, the injured spouse can file it after the fact by submitting a paper copy of the form to the service center where the return was filed.  In each of the calendar years 2014 and 2015 over 360,000 injured spouse claims were filed according to a table in the TIGTA report.

The TIGTA report explains the processing of the injured spouse claims. Some claims do not fit the criteria and the IRS rejects them.  Some cases require additional verification.  Most cases do not involve the clean payment of everything by the injured spouse as occurred in my example with Harry and Sally above.  So, a computation showing who paid what and who made what is necessary in order to allocate the payment of the refund between the two parties.  Usually, the husband and wife will both be working toward the same goal of maximizing the injured spouse claim but sometimes the interest of the parties may have diverged by the time of the injured spouse claim.  It is even possible that the need to use the injured spouse claim process could have exacerbated the situation and caused competing interests.

The IRS is supposed to process the injured spouse claim within 45 days. This is the normal time the IRS has to process a return or refund claim in order to avoid interest.  The 45 day period is measured from the later of:]

  • The due date of the return (determined with regard to any extension of time for filing the return).
  • The date the tax return was received (used when the return is filed after the return due date, determined without regard to any extension of time for filing the return).
  • The date the tax return that could be processed was received (date the tax return was received in a complete and processable form).

The IRS does not like to pay interest to taxpayers because it has delayed in processing a submission so it measures the number of cases on which it must pay interest and generally regards these cases as system failures. TIGTA runs reports like this to measure IRS effectiveness in meeting its goals.

TIGTA found that 91% of the injured spouse cases were accurately processed and seemed pretty satisfied with that result. It also found that 30% of the cases did not meet the processing time frame resulting in interest due to the injured spouse.  TIGTA did not seem satisfied with that result.  The TIGTA report goes into some detail about the reasons for the missed deadlines and how the process might be improved.  I will not recount that information.  I think the report gives a reader some idea of what to expect when you make an injured spouse request.  The fact that the IRS misses the 45 day time frame on 30% of the cases did not surprise me.  When you are advising your client of what to expect if you are caught up in the process, the data may be useful as you make that explanation.

The part I found most interesting was on page 9 of the report where TIGTA chastised the IRS for not making changes in a report it produced in 2004 which was apparently the last time it looked at injured spouse claims. The earlier report had recommended that the IRS provide taxpayers with “consistent information necessary to ensure that they can easily and correctly comply with injured spouse claim requirements.”  In this regard TIGTA noted that the IRS does not inform taxpayers that they have six years to make a claim for injured spouse relief when the IRS takes the money and applies it to a “non-tax debt” which I think means a non-IRS debt because some of the money goes to pay state taxes.  The report points out that taxpayers have three years to file a claim if the money is offset to a tax debt.

The IRS did a nifty job of blaming its lawyers for failing to give clear guidance on the law. TIGTA countered that the IRS took seven years after receiving the unclear guidance before it asked Chief Counsel to clarify its guidance.  No matter who is at fault, I learned something new in reading this and finding out that there was a six year statute for claiming injured spouse status for refunds applied to non-tax debt.  I do not know if I will ever use this information.  I think it is information that is best put into the hands of return preparers who see the taxpayers at a time when they can avoid the problem by filing the form with the return and who see a lot more taxpayers than those of us doing controversy work.

When one spouse owes a debt that the couple knows will be offset, the couple has to make a decision at the time they file their return. I have talked to a number of spouses married to someone with such debt who refuse to file a joint return because of the existence of the debt.  This refusal causes them to miss out on many benefits available to those who file joint returns.  Using  the injured spouse relief provisions may cause a few more problems in filing the return, may slow down the refund a bit but a joint return may yield thousands of dollars in tax benefits lost by using the married filing separate filing status.  These provisions should be part of a discussion by return preparers and tax planners.  The report helps to demystify the process and for that reason is worth the read.

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