On July 25, 2011, the IRS issued Notice 2011-70, stating that it will no longer deny a Request for Innocent Spouse Relief pursuant to Section 6015(f), “Equitable Relief,” on the basis that the claim was not submitted within two years of the date of the IRS’s first collection activity.
The prior rule was stated in Treasury Regulations Section 1.6015-(5). This rule required a taxpayer to submit his or her Form 8857, Request for Innocent Spouse Relief, within two years of the date of the IRS’s first “collection activity.” “Collection activity” most notably includes the issuing of a “Final Notice of Intent to Levy and Your Right to a Hearing,” a refund offset, and filing for bankruptcy protection. If the claim was not submitted within this two-year period, the IRS considered it time-barred.
Treasury Regulations Section 1.6015-(5) became the subject of significant controversy in 2009, when the United States Tax Court held that it was invalid. Lantz v. Comm’r, 132 T.C. 8 (2009). The Lantz decision was eventually overturned by the 7th Circuit Court of Appeals. Lantz v. Comm’r, 607 F. 3d 479 (7th Cir. 2010). Since Lantz, two other Circuit Courts, the 3rd and the 4th, have upheld the validity of Treasury Regulations Section 1.6015-(5). Mannella v. Comm’r, 631 F.3d 115 (3d Cir. 2011); and, Jones v. Comm’r, 642 F.3d 459 (4th Cir. 2011). In spite of these decisions, the IRS determined that the Treasury Regulations should be revised to allow individuals who request for Equitable Relief a longer period to submit their claims.
The new Equitable Relief rule requires the requesting spouse to file his or her claim within the statutory collection period, which is generally ten years from the date of the tax assessment, plus any extensions. To receive a refund of any prior payment made toward a tax liability, the requesting spouse must file his or her claim within three years of the date of the tax assessment or two years from the date of the payment, whichever date is later.
The IRS has also instituted the following transitional rules:
Previously Submitted Claims. Individuals who previously submitted an Equitable Relief claim, but were denied solely because of the two-year rule, can resubmit their claim and the IRS will consider it on the merits.
Pending Litigation Cases. The IRS will consider the merits of the case for all individuals who have pending litigation in which the two-year rule was previously in issue.
Previously Litigated Cases. If the taxpayer litigated his or her case, and received a denial from the United States Tax Court or Circuit Court of Appeals, solely because of the two-year rule, the IRS has stated that it will not pursue any enforced collection action against these individuals.
The two-year statute of limitations still applies for Requests for Innocent Spouse Relief pursuant to Section 6015(b), known as “Traditional Innocent Spouse Relief,” and Section 6015(c), known as “Separation of Liability Relief” or “Allocation of Deficiency Relief.” Both types of relief are only available to taxpayers who were assessed additional tax as a result of an audit. When it is possible, we recommend that you continue to advise your Innocent Spouse Relief candidates to file their claim within the two-year period to preserve their claim for all three types of relief.