25.15.3  Technical Provisions of IRC 6015

Manual Transmittal

March 08, 2013

Purpose

(1) This transmits revised IRM 25.15.3, Relief from Joint and Several Liability, Technical Provisions of IRC 6015.

Material Changes

(1) IRM 25.15.3.2 deleted paragraphs 3 and 4 and renumbered the remaining paragraph.

(2) IRM 25.15.3.3 Note clarified, information pertaining to the RS.

(3) IRM 25.15.3.3 (5) changed the procedures on providing appeal rights when the account is full paid and the RS has been granted partial relief to full relief.

(4) IRM 25.15.3.4.1.1(1) revised procedures for penalties and interest and added a table.

(5) IRM 25.15.3.4.1.1.1 entire section restructured.

(6) IRM 25.15.3.4.2.1(1) and (2) added clarification for allocating overstated withholding.

(7) IPU 110673 issued 03-28-2011 IRM 25.15.3.4.2.2 corrected the last sentence.

(8) IRM 25.15.3.4.3 updated IRM reference number.

(9) IPU 111354 issued 07-29-2011 IRM 25.15.3.4.4 revised based on the two-year deadline being lifted for IRC 6015(f).

(10) IRM 25.15.3.4.4(2) IRC 6330 notices Note revised to add TC 971 AC 069.

(11) IRM 25.15.3.4.4(2) third bullet added TC 520 closing codes.

(12) IRM 25.15.3.5.1(1) Note revised added prior to date.

(13) IRM 25.15.3.5.2 rewritten with new example.

(14) IRM 25.15.3.5.6 throughout section replaced references of W and H to RS and NRS.

(15) IRM 25.15.3.5.6(1)-(3) added information on social security benefits and reduced or eliminated credits.

(16) IRM 25.15.3.5.6(6) updated IRM reference number.

(17) IRM 25.15.3.6.1(1) added information about IRC 66.

(18) IRM 25.15.3.6.2(4) updated IRM reference number.

(19) IRM 25.15.3.6.3(2) added a note about abuse impacting knowledge.

(20) IRM 25.15.3.6.3(3) changed signed to filed.

(21) IRM 25.15.3.6.4(2) changed IRC 6013(e) to IRC 6015(f).

(22) IRM 25.15.3.7(4) Note - added information to treat as a full allowance when granting relief under IRC 6015(c) for the balance due, but not refunding any money.

(23) IRM 25.15.3.7.2.1(7) and (8) added IRM references.

(24) IRM 25.15.3.7.2.2.1 added two notes on allocating credits.

(25) IRM 25.15.3.7.2.2.8 example revised to change W and H to RS and NRS.

(26) IRM 25.15.3.7.2.2.10 additional information added throughout.

(27) IRM 25.15.3.7.2.2.11 clarified that they do not qualify for relief.

(28) IRM 25.15.3.7.2.2.12 changed jointly to equally.

(29) IRM 25.15.3.8 through 25.15.3.8.4.2 totally revised based on the changes to IRC 6015(f).

(30) IRM 25.15.3.9.1 revised the preliminary determination letter numbers.

(31) IRM 25.15.3.9.2 revised the final determination letter numbers.

(32) IRM 25.15.3.9.3 revised some of the other letter numbers.

(33) IRM 25.15.3.10(1) added "and it is signed on behalf of the commissioner" .

(34) IRM 25.15.3.10(5) added letter numbers.

(35) IRM 25.15.3.10(6) rewritten and table added.

(36) Editorial changes were made throughout this IRM.

Effect on Other Documents

IRM 25.15.3, Technical Provisions of IRC 6015, dated March 1, 2011 is superseded. IRM Procedural Update (IPU) 110673, issued March 28, 2011, and IPU 111354, issued July 29, 2011, have been incorporated into this IRM.

Audience

Employees in all business operating divisions who have contact with taxpayers addressing an innocent spouse issue.

Effective Date

(03-08-2013)

Steven Klingel
Director, Reporting Compliance
Wage and Investment Division

25.15.3.1  (07-17-2009)
Introduction IRC 6015

  1. This section discusses the innocent spouse provisions of IRC 6015 which provide three avenues for relief from joint and several liability:

    • IRC 6015(b), Innocent Spouse Relief, provides an election for relief from a deficiency/understatement of tax liability.

    • IRC 6015(c), Separation of Liability, provides an election to allocate a deficiency/understatement.

    • IRC 6015(f), Equitable Relief, provides IRS with discretion to grant equitable relief from deficiencies and underpayments if the relief provisions under IRC 6015(b) or IRC 6015(c) do not apply.

25.15.3.2  (03-08-2013)
Election for Relief under IRC 6015

  1. IRC 6015(e) was amended by the Tax Relief and Health Care Act of 2006 on December 20, 2006, so that most claims for relief made solely under IRC 6015(f) result in a prohibition on collection and a suspension of the collection statute just as elections under IRC 6015(b) and IRC 6015(c) always had, see IRM 25.15.1.8, Statute of Limitations on Collection, for a more detailed discussion of the suspension of the collection statute. The June 2007 and September 2010 versions of Form 8857 no longer asks a requesting spouse (RS) to specifically request under which subsections of IRC 6015 the RS is seeking relief. Instead, the Service will consider relief under subsections (b), (c), and (f).

  2. Because of the amendment to IRC 6015(e) and the revision to Form 8857, consider a RS’s claim for relief under all subsections of IRC 6015 no matter which revision of Form 8857 is used by the RS, even if the RS used a prior version of Form 8857 and only checked the box indicating equitable relief under IRC 6015(f).

  3. A RS may only withdraw a request for relief prior to the issuance of a preliminary determination letter.

25.15.3.3  (03-08-2013)
Notification to Non-requesting Spouse (NRS) per IRC 6015(h)(2)

  1. The non-requesting spouse (NRS) must receive notice of, and an opportunity to participate in, any proceeding with respect to an election of relief from joint and several liability under IRC 6015.

    Note:

    Always protect the privacy and return information of the RS, per IRC 6103, disclosure statute.

  2. Examiners shall issue an administrative proceeding notice (Letter 3284) to the NRS giving a 30 day response time.

  3. Notice to the NRS is not required to be sent certified mail but must be sent to the NRS's last known address.

  4. Examiners shall notify the NRS of the preliminary determination made, and the right to an administrative appeal when relief is fully or partially allowed to the RS. The NRS may file a protest and request an Appeals conference, see Rev. Proc. 2003–19.

    Exception:

    Do not provide appeals rights to the NRS if the NRS is no longer liable for the tax liabilities at issue, e.g., tax liabilities were discharged in the NRS's bankruptcy proceedings and/or offer-in-compromise, or the NRS's Collection Statute Expiration Date (CSED) has expired.

  5. If relief is denied in full, inform the NRS that he/she will be contacted if the RS protests the determination and Appeals proposes to increase the amount of relief granted in the preliminary determination. Do not provide appeal rights to the NRS when the account is full paid and the RS has been granted full relief under IRC 6015(c). This is because no refunds may be made under IRC 6015(c) and the NRS will not be held liable for additional amounts.

25.15.3.3.1  (03-01-2011)
Notification to NRS in Cases of Alleged Abuse

  1. When abuse is alleged, the Cincinnati Centralized Innocent Spouse Operation (CCISO) will send the RS a notification letter informing them the NRS will be notified and given an opportunity to participate. This is not necessary for claims filed on Form 8857, revised June 2007 or later because the instructions include this information. If it is necessary, CCISO will hold the claim; pending a response from the RS. The letter informs the RS of the following options:

    1. Should they want to proceed, the notification letter to the NRS will be sent from CCISO as an added precaution to conceal the RS's geographic location. The RS’s new name, address, telephone number, or employer will not be used in correspondence to the NRS. CCISO will refrain from sending the notification letter to the NRS; pending a response from the RS. The RS will forward any response to the unit or area working the claim. The preliminary determination letter to the NRS will also be issued by CCISO.

    2. If the RS does not want CCISO to contact the NRS, they need to withdraw their claim as indicated in the letter. If the RS does not withdraw, continue processing.

  2. For claims originating in an area office, the examiner will contact the RS to determine if there is a need to take additional precautions to conceal the RS’s location. The instructions for claims filed on Form 8857, revised June 2007 or later, include this information, making it unnecessary to send a notification letter to an RS who uses the revised form. If so, the area examiner will send a cover letter with Letter 3284 to the NRS stating the examiner has been notified of the Innocent Spouse claim and will be working the issue along with the other exam issues. The RS’s new name, address, telephone number, or employer must not be used in correspondence to the NRS. The NRS should be given 30 days to respond.

25.15.3.4  (05-01-2005)
Terms and Definitions

  1. The following are definitions of terms used throughout this IRM section.

25.15.3.4.1  (07-20-2009)
Deficiency/Understatement

  1. The term understatement is defined as:

    1. the excess of the amount of the tax required to be shown on the return for the taxable year, over

    2. the amount of tax imposed which is shown on the return, reduced by any rebate (within the meaning of IRC 6015(b)(3)IRC 6211(b)(2)). See IRC 6662(d)(2)(A).

    For IRC 6015 purposes, a deficiency and understatement are treated the same. A RS can be considered for relief under IRC 6015(b), IRC 6015(c), and IRC 6015(f) for a deficiency/understatement.

  2. If the RS signed a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, Form 4549, Income Tax Examination Changes, or other report agreeing to additional joint liability, then the liability should be treated as an understatement/deficiency and the RS may be considered for relief under IRC 6015(b), IRC 6015(c), and IRC 6015(f).

25.15.3.4.1.1  (03-08-2013)
Item

  1. An item is that which is required to be separately listed on an individual income tax return or any required attachments. Interest and dividends from the same source are considered separate items. Items include, but are not limited to, gross income, deductions, credits, and cost basis.

  2. Penalties and interest are not erroneous items and relief from penalties and interest follows relief granted on the underlying item(s).

    Note:

    Although no relief is available separately for penalties and interest under IRC 6015 under the right circumstances, penalties (not interest) may be abated for reasonable cause or other penalty relief provisions.

    IF THEN
    RS would qualify for relief of tax under any section of IRC 6015 Grant relief for the corresponding penalties and interest
    RS is eligible for relief from an underpayment under IRC 6015 Grant relief of the penalties and interest corresponding to the underpayment
    RS is not eligible for relief from the tax RS remains liable for the penalties and interest
    RS only requests an abatement of penalties Follow procedures in IRM 25.15.7.5.8(4), Account Problems

25.15.3.4.1.1.1  (03-08-2013)
Erroneous Item

  1. An erroneous item is any item resulting in an understatement or deficiency in tax to the extent such item is omitted from, or improperly reported (or improperly characterized) on, an individual income tax return. Some examples would be:

    • Unreported income from an investment asset resulting in an understatement or deficiency in tax

    • Ordinary income improperly reported as capital gain resulting in an understatement or deficiency in tax

    • A deduction for an expense that is personal in nature that results in an understatement or deficiency in tax

    • An improperly reported item that affects the liability on other returns

25.15.3.4.2  (03-01-2011)
Underpayment

  1. An underpayment is an unpaid amount due from self-assessed taxes on either an original or amended joint return if a statutory notice of deficiency was not issued. A RS can only be considered for relief under IRC 6015(f) for an underpayment.

25.15.3.4.2.1  (03-08-2013)
Overstated Withholding

  1. Overstated withholding is considered an underpayment of tax and qualifies for consideration only under IRC 6015(f). Consider it jointly attributable unless the RS establishes he/she did not receive or benefit from the overstated withholding.

  2. It does not matter whether the overstated withholding was refunded or not.

    Example:


    Tax on original return $6,000
    Withholding claimed $10,000 (actual withholding = $0)
    Refund $4,000
    Automated Underreporter (AUR) operations issued a CP 2000 notice to reverse the withholding, resulting in $10,000 owed. The $10,000 owed is an underpayment. Relief will be considered under IRC 6015(f) only. The examiner should consider who received and benefited from the $4,000 refund when making a determination as to relief.

  3. IRC 6201(a)(3) allows the Service to immediately assess the liability resulting from overstated withholding. Thus, if the overstated withholding was refunded, there should be a Transaction Code (TC) 290 assessment in the amount of the overstated withholding on the taxpayer’s module. The existence of the TC 290 should be verified as soon as the claim is accepted for processing. If the TC 290 is not there and the assessment statute expiration date (ASED) has not expired (which is generally three years from the filing date of the return), then action should be taken to have the assessment made before the ASED expires. If the ASED has expired, then the Service’s collection alternatives are limited. An erroneous refund suit can be considered if conditions for such a suit are met. Any questions should be immediately referred to Area Counsel.

25.15.3.4.2.2  (03-08-2013)
Substitute for Return (SFR)

  1. A taxpayer’s filing status on a Substitute For Return (SFR) will be either single or married filing separately. The Service cannot elect joint filing status for married taxpayers; thus, there will not be a joint liability, and there can be no relief under IRC 6015 from a liability due to an SFR. The taxpayer may later file a joint return with his/her spouse. It is not until this joint return is filed that relief under IRC 6015 can even be considered. The important thing to remember when determining whether relief under IRC 6015(b), IRC 6015(c), or IRC 6015(f) is available is the type of liability (underpayment v. understatement) generated by the joint return.

  2. If the Service filed an SFR for a nonfiler spouse (and took no action against the other spouse) and the spouses later file a joint tax return before the issuance of a Statutory Notice of Deficiency, this joint return should be considered the spouse's original return for purposes of relief under IRC 6015. If the joint return properly reported all income but was not accompanied by full payment of the tax liability, the liability is an underpayment (self-assessed tax). Thus, if either the nonfiler spouse or the other spouse requests relief under IRC 6015 for this joint liability, only relief under IRC 6015(f) can be considered. If the joint return underreports income, and the Service determined a deficiency, then IRC 6015(b), IRC 6015(c), and IRC 6015(f) can be considered for either spouse for the portion that is a deficiency.

  3. If the Service filed an SFR for a nonfiler spouse (and took no action against the other spouse) and an assessment was made following a Statutory Notice of Deficiency, the resulting amount owed by the nonfiler spouse is a liability due to a deficiency assessment. However, because no joint election was made, the taxpayer’s liability is not eligible for relief under IRC 6015. If the nonfiler spouse and the other spouse later file a joint return that properly reported all income but was not accompanied by full payment of the tax liability, the liability should be considered an underpayment. Thus, if either the nonfiler spouse or the other spouse requests relief under IRC 6015 for this joint liability, only relief under IRC 6015(f) can be considered. If the joint return underreports income, and the Service determines a deficiency, then IRC 6015(b), IRC 6015(c), and IRC 6015(f) can be considered for either spouse for the portion that is a deficiency.

    Note:

    This is a change in how the Service treats these claims. Previously, the Service treated the joint return as not changing the character of the assessment from a deficiency to an underpayment, even if the assessed tax is later abated or adjusted to reflect the tax on the joint return filed. This change was made because when the Service and the taxpayers agree that the amount of tax reported on the return is correct (which is the case here when the spouses file a joint return that the Service accepts and processes), there is no understatement or deficiency. See IRM 25.15.3.4.1 for the definition of understatement.

  4. If the Service filed an SFR for a nonfiler, and the taxpayer and the taxpayer's spouse sign an examination report or similar waiver agreeing to the tax prior to the issuance of a Statutory Notice of Deficiency, the tax liability is considered an understatement. This is because signing a report or waiver is not the equivalent of signing and filing a joint return.

25.15.3.4.3  (03-08-2013)
Math Error

  1. See IRM 25.15.7.5.15, Math Error, for instructions.

25.15.3.4.4  (03-08-2013)
Collection Activity

  1. The RS must file a claim for relief under IRC 6015(b) and IRC 6015(c) with the Service no later than two years from the date of the first collection activity against the RS after July 22, 1998, with respect to the joint tax liability. Claims for equitable relief under IRC 6015 (f) are no longer subject to a two-year deadline. Collection activity against the RS means collection against property in which the RS has an ownership interest (other than solely through the operation of community property laws), including property owned jointly with the NRS. Because not all events that involve the Service’s attempt to collect the liability will trigger the two year period, examiners should exercise caution when determining if an IRC 6015(b) or IRC 6015(c) claim is time barred. Collection activity for this purpose should not be confused with "prohibited collection actions." IRM 25.15.3.4.5., Prohibited Collection Actions.

    Note:

    Notice 2011–70 lifted the two-year rule deadline for claims filed under IRC 6015(f). A claim will be timely filed under IRC 6015(f) as long as it is filed within the time period the collection statute or refund statute remains open.

    Note:

    Per IRC 7502, timely mailing is treated as timely filing, so when the claim received date is past the two-year deadline over the time frame required to file a claim, look at the postmark date. If the postmark date is prior to the two-year deadline, consider the claim timely.

  2. The following actions by the Service constitute collection activity:

    • Refund offsets: The offset of an overpayment of the RS against the joint liability under IRC 6402 constitutes collection activity. See Campbell v. Commissioner, 121 T.C. 290 (2003), see also Treas. Reg. 1.6015–5(b).

      Note:

      In McGee v. Commissioner, 123 T.C. 314 (2004), the Tax Court held that an IRC 6402 offset alone will not trigger the two year period for filing a claim unless the Service at the time of the offset notifies the RS of his or her right to file a claim for relief under IRC 6015. Prior to this court decision, the Service did not routinely notify taxpayers of their right to file an IRC 6015 claim at the time of the offset. On or about March 7, 2005, the Service began to provide this notice by including Publication 1 as a stuffer with all refund offset notices, and in August 2005, the offset notices themselves included language explaining the taxpayers’ right to file an IRC 6015 claim. Thus, if the offset occurred prior to March 7, 2005, you should consider the claim to be timely unless there is evidence that the Service notified the RS, or the RS was otherwise aware, of his or her right to file an IRC 6015 claim at the time of the offset.

      Note:

      Now that more than two years have elapsed since Publication 1 started being a stuffer with the refund offset notice and/or the refund offset notice itself started containing language explaining the taxpayers' right to file an IRC 6015, careful attention should be made to cases in which the Service offset a refund in April 2005 or later, especially those refunds offset after August 2005. If the Form 8857 was filed more than two years after such offset, the claim should be denied under IRC 6015(b) and IRC 6015(c).

    • IRC 6330 notices: For claims filed on or after July 18, 2002, the sending of an IRC 6330 notice to the taxpayer will trigger the two year period for filing a claim under IRC 6015(b) and IRC 6015(c). An IRC 6330 notice is the notice sent pursuant to IRC 6330 which provides the taxpayer with notice of the Service's intent to levy and of their right to a Collection Due Process (CDP) hearing. A CDP Notice will not start the two year period for filing a claim under IRC 6015(b) and IRC 6015(c) unless the CDP notice informs the taxpayer of the taxpayer's right to file a claim under IRC 6015. The Service has been informing taxpayers of the innocent spouse claim process through the inclusion of Publication 594 as a stuffer with the CDP Notice (either LT11 or Letter 1058). Over the years, the discussion of the innocent spouse claim process in Publication 594 has improved. Based on the language discussing innocent spouse relief in versions of Publication 594, prior to May 2002 in cases where the Form 8857 was filed more than two years after a CDP Notice issued prior to May 2002, the Service should treat the claim for relief as being timely filed unless another collection activity occurred more than two years prior to the filing of the innocent spouse claim filed under IRC 6015(b) or IRC 6015(c) or if filed after the collection statute has expired under IRC 6015(f).

      Example:

      The claim for relief under IRC 6015(b) was filed on September 1, 2005, and the IRC 6330 notice was issued January 3, 2002. Although the claim for relief was filed more than two years after the issuance of the CDP Notice, this claim should be treated as timely filed because the notification of the taxpayer's right to file an innocent spouse claim that was included with the CDP Notice was not sufficient. If, however, the CDP Notice was issued on January 3, 2003, then the discussion of the innocent spouse claim process in Publication 594 would have been sufficient to start the two year period. Thus, the election or request for relief must have been made by January 3, 2005. As the Form 8857 was not received until September 1, 2005, the claim is not timely filed.

      Note:

      For claims for relief filed on or after July 18, 2002, a TC 971 Action Code (AC) 069 on TXMOD, which represents the issuance of an IRC 6330 CDP Notice, dated May 2002 or later will be considered the date from which the two year period runs. When an IRC 6330 notice starts the collection activity against the RS, there must be a TC 971 AC 069 present on the account for the RS. If the RS is the secondary taxpayer, the TC 971 AC 069 must contain an (X-ref) taxpayer identification number (TIN). If the RS's TC 971 AC 069 is followed by a TC 971 AC 068, the notice was returned as undeliverable, and the TC 971 AC 069 is not considered the start of collection activity against the RS. A TC 971 AC 469 indicates the IRS received no response from the Post Office; so, the TC 971 AC 069 does not start the collection activity against the RS.

      Note:

      For claims filed prior to July 18, 2002, the actual levy or seizure constitutes the collection activity, and the two year period runs from the date of the levy or seizure.

    • The filing of a suit by the United States against the RS for the collection of a joint tax liability: Triggers the two year period for claims filed under IRC 6015(b) and IRC 6015(c). If a collection suit was filed, the two year period will begin to run from date the suit is filed. See Treas. Reg. 1.6015-5(b)(4), example 4. The transcript will not state that a collection suit has been commenced by the Department of Justice (DOJ). When an examiner sees a general litigation code (TC 520 with closing code 70,75,78-81, or 84) with a date more than two years before the claim is filed on a transcript, the examiner should investigate to determine if the DOJ has commenced a collection suit against the RS (or filed a claim in a court proceeding to collect the RS's property more than before the claim was filed). A collection suit cannot be commenced in Tax Court. Thus, if the examiner sees a Tax Court litigation code (TC 520 with a 72 or 74 closing code), the examiner does not need to investigate any further (although that could be an indication that this matter was tried before, which could mean that the claim is barred by res judicata). IRM 25.15.3.5.2., Collateral Estoppel.

      Note:

      The two year period begins to run when the RS is named as a defendant in a complaint filed in a suit to reduce tax assessments to judgement or to foreclose even though the tax lien may not list specific assets the Service wishes to collect from.

    • Claims in judicial proceedings: The filing of a claim by the Service in a court proceeding in which the RS is a party, or which involves the property of the RS, including claims in bankruptcy and claims in interpleader (a legal proceeding brought by a disinterested third party to determine the rightful claim to property of competing claimants) actions involving property of the RS also triggers the two year period.

      Example:

      Proof of claims (POC) filed in bankruptcy. The examiner should look at the transcripts to see if a bankruptcy litigation code is present more than two years before the IRC 6015(b) and IRC 6015(c) claim was filed. If this situation is present, the examiner should investigate to determine if the Government filed a POC. First, the examiner should contact the bankruptcy unit that handled the bankruptcy case. This office should be able to obtain information regarding whether a POC was filed. If a POC was filed, the examiner should try and obtain from the Insolvency unit a filed stamped copy of the POC, along with any documentation that would establish who was served with a copy of the POC, and at what address.

      Example:

      Claims in other proceedings. Again, a general litigation code on the transcript indicates a possible claim in a judicial proceeding. If the general litigation code appears on the transcript, the examiner should contact the Chief Counsel attorney who handled the case to discuss whether a collection suit, discussed above, or claim in another proceeding was filed. The Chief Counsel attorney should be able to ascertain whether a claim was ever filed, and if so, the date the claim was filed. The two year period will begin on the date the claim was filed. In these situations, the examiner should request that the field attorney provide the examiner with copies of any documentation which establishes the date that the RS was served with a copy of the claim.

  3. "Collection activity" does not include the following IRS actions:

    • Notices of deficiency

    • Demands for payment of tax

    • Notices of Federal Tax Lien

  4. There may be cases in which there has been no collection activity as described above, even though the RS may have received numerous demands for payment or other generic notices. Thus, the two year period for filing a claim for relief under IRC 6015(b) and IRC 6015(c) may not have expired on certain old and inactive balance due cases.

25.15.3.4.5  (03-08-2013)
Prohibited Collection Actions

  1. IRC 6015(e)(1)(B) generally prohibits levies and judicial proceedings while an innocent spouse claim is pending. Refund offsets are not prohibited by statute. However, the Service has made a business decision not to offset refunds while a claim is pending.

  2. If a prohibited collection action or a refund offset has occurred in violation of paragraph 1 above, corrective measures must be taken to refund the money to the RS.

25.15.3.5  (03-01-2011)
Special Considerations

  1. Prior court decisions on a given tax year may affect whether a request for relief from joint and several liability can be considered. These are not limited to Tax Court decisions. These doctrines also apply to other court decisions. These actions are defined below:

    • Res Judicata - IRM 25.15.3.5.1, Res Judicata, discusses the principles of res judicata.

    • Collateral Estoppel - IRM 25.15.3.5.2, Collateral Estoppel, discusses collateral estoppel.

25.15.3.5.1  (03-08-2013)
Res Judicata

  1. Res Judicata - Res judicata generally precludes any kind of claim for a tax year previously litigated. In the case of any claim for relief under IRC 6015, if any court has rendered a final decision on the RS's tax liability for a tax year, such decision shall be conclusive if relief under IRC 6015 was at issue in the prior case or if the RS meaningfully participated in the proceeding and the RS could have raised relief under IRC 6015 in that proceeding. See IRC 6015(g)(2).

    Note:

    A RS has not meaningfully participated in a proceeding prior to July 22, 1998 since, due to the effective date of IRC 6015, relief under IRC 6015 was not available in that proceeding.

  2. Final Tax Court Decision Prior to July 22, 1998 - A taxpayer who has unsuccessfully litigated his/her entitlement to innocent spouse relief under the prior law of IRC 6013(e) may elect relief under the new provision of IRC 6015 for the same year if a portion of the tax liability remains unpaid as of July 22, 1998. See Treas. Reg. 1.6015-1(e).

  3. Final Tax Court Decision on or after July 22, 1998 — If the issues creating the deficiency were the subject of a prior Tax Court decision entered on or after July 22, 1998, and the spouse seeking relief did not raise the issue of his/her eligibility for relief under IRC 6015 in that proceeding, the spouse may not raise it subsequently if the court determines the RS "participated meaningfully" (actively participated) in the prior proceeding. See Treas. Reg. 1.6015–1(e).

  4. Res Judicata and Bankruptcy - Not all bankruptcy proceedings determine the merits of the tax liability; some bankruptcy proceedings merely determine the collectibility of the tax liability. If the merits of the tax liability were at issue in the bankruptcy proceeding, the RS meaningfully participated in the proceeding, and relief under IRC 6015 was raised or could have been raised, then res judicata applies and the RS is precluded from raising a subsequent request for relief under IRC 6015. If the merits of the tax liability were not at issue during the bankruptcy proceeding, res judicata will not apply and the RS will not be barred from making a subsequent request for relief under IRC 6015.

25.15.3.5.2  (03-08-2013)
Collateral Estoppel

  1. Collateral Estoppel, also known as issue preclusion, is a legal doctrine, which holds the findings of fact or law of a prior judicial decision are binding in a subsequent proceeding between the same parties. When collateral estoppel applies, the taxpayer is prohibited from litigating an issue that was identical to an issue previously litigated, which was part of a valid final judgment.

    Example:

    In tax year 1, the Tax Court determines that the requesting spouse was not entitled to relief under section IRC 6015(b) because he or she had knowledge of income from an illegal business operated by the non-requesting spouse. Under the doctrine of res judicata (see IRM 25.15.3.5.1), the requesting spouse could not subsequently request relief under section 6015(f) for tax year 1. The innocent spouse determination made by the Tax Court is res judicata for tax year 1 because the decision is final and the requesting spouse could have raised relief under (f) in that prior proceeding. However, for tax year 2, even if the requesting spouse was determined to have actual knowledge of the same illegal business in tax year 1, the requesting spouse would not be precluded from requesting relief under section 6015(f) as knowledge is only one factor to be determined under section 6015(f).
    Under the doctrine of collateral estoppel, the requesting spouse would be precluded from arguing that he or she did not have knowledge of the illegal business in a subsequent proceeding because the identical issue was litigated and determined by the Tax Court in its determination of tax year 1. But, collateral estoppel will not preclude the requesting spouse from raising the additional factors to be considered for relief under section 6015(f) as those factors had not been litigated and determined in the prior Tax Court proceeding.

25.15.3.5.3  (02-25-2010)
Issuance of a Second Final Determination Letter Under IRC 6015

  1. Refer to IRM 25.15.17, Reconsiderations, for information on circumstances that allow for issuance of a second final determination letter.

25.15.3.5.4  (05-01-2005)
Prior Accepted Offer in Compromise (OIC)

  1. Refer to IRM 25.15.1.2.7, Offer in Compromise (OIC), for information on an OIC accepted prior to the filing of the Form 8857, Request for Innocent Spouse Relief.

25.15.3.5.4.1  (05-01-2005)
Pending Offer in Compromise

  1. Refer to IRM 25.15.1.2.7, Offer in Compromise (OIC), for information on a pending OIC.

25.15.3.5.5  (03-01-2011)
Closing Agreements

  1. A closing agreement, Form 866, Agreement as to Final Determination of Tax Liability, closes with finality the tax year and the type of tax to which it relates. See Treas. Reg. 301.7121-1(c). If a taxpayer signed a Form 866, he or she is precluded from consideration for relief from joint and several liability.

  2. A closing agreement, Form 906, Closing Agreement on Final Determination Covering Specific Matters, will generally relate to a specific matter or matters for a tax period, rather than to the entire liability. Only those matters covered in the closing agreement are conclusively closed. A taxpayer may request innocent spouse relief for adjustments not specifically covered in the closing agreement.

  3. If the RS was not a party to the closing agreement, using either Form 866 or Form 906, then the RS may file an innocent spouse claim for that year if the RS is otherwise eligible.

  4. Execution of a Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment, by the RS is not considered a closing agreement and does not preclude consideration for relief.

  5. TEFRA Settlement Agreements are addressed in IRM 25.15.1.2.8, Tax Equity and Fiscal Responsibility Act (TEFRA) Settlement Agreements.

25.15.3.5.6  (03-08-2013)
Understatements Resulting From an Increase to Adjusted Gross Income

  1. If an erroneous item (as defined in IRM 25.15.3.4.1.1.1) that is attributable to the NRS increases the adjusted gross income (AGI) and results in disallowance of another item on the return because of the increase to AGI, then any understatement caused by the disallowance of the other item will also be attributable to the NRS. This rule is applicable whether or not the RS received a refund (or a portion of a refund) due to the item.

    Example:

    A joint return shows a tax liability of $500 and an earned income tax credit (EITC) in the amount of $1500 which results in a refund of $1000. Upon examination NRS had additional unreported income that increased the tax liability on the return to $1000. In addition, the increase to the AGI from the unreported income resulted in the EITC being disallowed in full because the AGI now exceeded the maximum amount. The IRS determines a deficiency in the amount of $2000 ($500 from the unreported income and $1500 from the disallowed EITC). If RS requests relief under IRC 6015, the entire $2000 deficiency will be attributable to NRS because the EITC was disallowed solely due to the increase to adjusted gross income (AGI) of NRS's unreported income. Thus, RS will satisfy the attribution factors of IRC 6015(b) and IRC 6015(f). For purposes of IRC 6015(c) the deficiency related to the EITC will be initially allocated to NRS.

    Exception:

    This does not apply to the RS's social security benefits. The social security benefits will be attributable to the RS.

  2. When credits are reduced or eliminated due to the increase in AGI, the changes are attributable to what caused the increase to AGI.

    Example:

    If the NRS's income caused the increase to AGI, the reduced or eliminated credits are attributable to the NRS.

  3. When the education credits are reduced or eliminated due to lack of verification, then it will be attributable to the party actually having the education expenses. If the credit is due to a child having the expenses, then allocate by percentage. It is important to know why the education credit was reduced.

  4. For purposes of determining whether a RS knew or had reason to know of the item that was disallowed due to the increase in AGI, the RS's knowledge or reason to know regarding the erroneous item that resulted in the increase in AGI will control.

    Example:

    Thus, in the example (1) above, if RS knew or had reason to know of NRS's unreported income, then RS will have knowledge or reason to know of the deficiency related to the EITC. On the other hand, if RS did not know or have reason to know of NRS's unreported income, then RS will not have knowledge of reason to know of the deficiency related to the EITC.

  5. If the item is attributable to the NRS and the RS is determined to not have knowledge or reason to know of the item, other factors still need to be determined.

  6. For purposes of IRC 6015(b), the claim would still need to be timely and it would have to be inequitable to hold the RS liable (see IRM 25.15.3.6.4(1) Inequitable to Hold the Requesting Spouse Liable).

  7. Other examples of items that might result in an understatement due to an increase to AGI include, but are not limited to, itemized deductions, alternative minimum tax, student loan interest adjustment, and other credits.

  8. These rules do not apply if there is another reason for disallowing the item, such as not having a qualifying child for the EITC or lacking substantiation for a claimed deduction. In that situation, the normal attribution and knowledge rules apply.

25.15.3.6  (09-01-2006)
IRC 6015(b) — Innocent Spouse Relief Qualifications

  1. To qualify for innocent spouse relief under IRC 6015(b), the RS must establish each of the following elements:

    1. A joint return was filed for the year in which relief is requested;

    2. There is an understatement of tax, see IRM 25.15.3.4.1, Deficiency/Understatement, attributable to erroneous items of the NRS;

    3. The RS did not know and had no reason to know of the understatement at the time the return was signed;

    4. Taking into account all the facts and circumstances, it would be inequitable to hold the RS liable for the deficiency attributable to the understatement; and

    5. The request for relief is made within two years from the date of the first collection activity (with respect to the RS) after July 22, 1998.

25.15.3.6.1  (03-08-2013)
Joint Return

  1. The first requirement is that there must be a joint return filed for the year for which relief is requested. If a joint return was not filed, relief under IRC 6015(b) is not available. If the RS is domiciled in a community property state, IRC 66 treatment may be available. See IRM 25.15.5Relief from Community Property Laws/Community Property States.

25.15.3.6.2  (03-08-2013)
Understatement Attributable to Erroneous Item of the Other Spouse

  1. The second requirement provides there must be an understatement of tax attributable to erroneous items of the NRS. Attribution is a critical factor. Items attributable to the RS do not qualify for relief. You cannot be relieved of tax on your own items including joint items. In most cases, examiners should first consider attribution before other factors.

  2. Math errors under IRC 6213(g)(2) are generally considered to be deficiencies for innocent spouse purposes of determining relief under IRC 6015. However, math error adjustments to withholding and estimated tax are not considered deficiency assessments. See IRC 6211(b)(1) and IRM 25.15.7.5.15, Math Error.

  3. See IRM 25.15.3.4.1, Deficiency/Understatement, for a definition of an understatement of tax.

  4. See IRM 25.15.3.4.1.1.1, Erroneous Item, for a definition of an erroneous item.

25.15.3.6.3  (03-08-2013)
Actual and Constructive Knowledge

  1. The third requirement under IRC 6015(b) is that the RS did not know and had no reason to know of the understatement at the time the tax return was signed.

  2. There are 2 standards that must be considered under this requirement:

    • Lack of Actual knowledge ("did not know" ); and,

    • Lack of Constructive knowledge ("had no reason to know" ).

    Note:

    If a RS establishes he or she was the victim of domestic abuse prior to the time the return was signed, but did not sign the return under duress (which might invalidate the joint election), and as a result of the prior abuse, did not challenge any of the items on the return for fear of retaliation, the actual knowledge or reason to know, of IRC 6015(b) will not apply.

  3. The examiner should consider the following factors (but, not limited to):

    • Nature of the erroneous item and the amount of the erroneous item relative to other items

    • The couple's financial situation

    • The RS's educational background and business experience

    • The extent of the RS's participation in the activity that resulted in the erroneous item

    • Whether the RS failed to inquire, at or before the time the return was filed, about items on the return or omitted from the return that a reasonable person would question

    • Whether the erroneous item represented a departure from a recurring pattern reflected in prior year's returns

  4. See Treas. Reg. 1.6015-2(c).

25.15.3.6.4  (03-08-2013)
Inequitable to Hold Requesting Spouse Liable

  1. The fourth requirement under IRC 6015(b) provides that, considering all the facts and circumstances, it is inequitable to hold the RS liable for the deficiency.

  2. A determination of whether it is inequitable to hold the spouse liable is based on factors in IRC 6015(f). see IRM 25.15.3.8, IRC 6015(f) Equitable Relief , for a further discussion of equitable relief under IRC 6015(f).

  3. These guidelines should be applied in a consistent and nondiscriminatory manner. Decisions to grant relief should not be based on the subjective personal and social beliefs of the IRS employee or any other inappropriate grounds.

25.15.3.6.5  (09-01-2006)
Time Period for Making Election

  1. The fifth requirement under IRC 6015(b) is that the RS must make an election under IRC 6015(b) within two years from the first collection activity against the RS that occurred after July 22, 1998. See IRM 25.15.3.4.4, Collection Activity, for the definition of collection activity.

25.15.3.6.6  (03-01-2011)
Partial Relief Available

  1. Partial relief may be granted when a spouse meets all of the other conditions for innocent spouse, except he or she had knowledge of, or reason to know of, some part of the understatement. IRC 6015(b) specifically allows partial relief from liability (including penalties, interest and other amounts) to the extent of the lack of knowledge and reason to know of the understatement. See Treas. Reg. 1.6015–2(e).

    Note:

    The knowledge requirement applies to each item of adjustment and to the extent of the knowledge of each erroneous item.

    Note:

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25.15.3.7  (03-08-2013)
IRC 6015(c) – Election to Allocate a Deficiency

  1. An individual may request to allocate a deficiency under IRC 6015(c).

  2. Both parties to a joint return may elect to allocate a deficiency. If only one spouse elects to allocate the deficiency, the liability of the NRS is not affected. The NRS would still be liable for the entire deficiency.

  3. The election to allocate applies only to deficiencies.

  4. If granted, the RS is relieved in whole or in part of the joint and several liability for the deficiency. The items giving rise to the deficiency are allocated in the same manner as they would have been if the spouses had filed separate returns. The analogy to separate returns goes to the allocation of items adjusted, not to the computation of allocable tax due to a separate return.

    Note:

    Refunds are not allowed under IRC 6015(c). Treat as a full allowance when granting relief under IRC 6015(c) for the balance due but not refunding any money.

  5. The allocation is made without regard to community property law.

25.15.3.7.1  (03-08-2013)
Qualifications

  1. To qualify for relief under IRC 6015(c), the RS must establish:

    1. A joint return was filed for the year in which relief was requested.

    2. There is a deficiency of tax attributable to erroneous items of the NRS. A spouse may be relieved for a portion of the tax liability arising from a joint item.

    3. He or she is either divorced, widowed, legally separated, or living apart for the 12 month period prior to the date the request was filed. Living apart for the 12 month period prior to the date the request was filed does not include a spouse who is temporarily absent from the household. A temporary absence exists if it is reasonable to assume the absent spouse will return to the household, or a substantially equivalent household is maintained in anticipation of such a return. Some examples may include absence due to incarceration, illness, business, vacation, military service, or education. The IRC 7703(a)(1) regulations provide the marital status of a deceased RS will be determined on the earlier of the date of election or the date of death in accordance with . The regulations also clarify a husband and wife who reside in two separate dwellings are considered members of the same household if the spouses are not estranged, or one spouse is temporarily absent.

    4. The request for relief is made within two years from the date of the first collection activity (with respect to the RS) after July 22, 1998. The two year time period for making the election is the same as required under IRC 6015(b). See IRM 25.15.3.6.5, Time Period for Making Election.

25.15.3.7.1.1  (03-01-2011)
Actual Knowledge Invalidates Allocation

  1. The Service has the burden of proving by a preponderance of the evidence that the RS had actual knowledge of the items giving rise to the deficiency at the time the return was signed. See IRC 6015(c)(3)(c).

  2. This differs from the standard for relief under IRC 6015(b) which places the burden on the RS to establish he or she did not know and had no reason to know of the understatement. "Did not know" and "had no reason to know" are sometimes referred to as actual and constructive knowledge, respectively. A spouse who was disqualified for innocent spouse relief due to constructive knowledge under IRC 6015(b) may qualify for relief under IRC 6015(c) if he or she did not have actual knowledge.

  3. In an omitted income case, actual knowledge includes knowledge of the receipt of the income. Knowledge of only the source of the income is not sufficient. Actual knowledge in an erroneous deduction or credit case means knowledge of the facts that made the item not allowable as a credit or a deduction. For example, in an erroneous deduction case involving disallowed deductions generated by a partnership, the Service must establish that the RS had actual knowledge of the factual circumstances which made the partnership items erroneous deductions. See Treas. Reg. 1.6015–3(c)(2).

  4. Actual knowledge of a portion of the deficiency does not make the spouse ineligible for IRC 6015(c) relief for the entire deficiency. It merely invalidates the allocation with respect to the specific items for which the spouse had actual knowledge.

25.15.3.7.2  (05-01-2005)
Allocating a Deficiency Under IRC 6015(d)

  1. The allocation must be made according to the procedures contained in IRC 6015(d). The allocation takes into consideration limitations in IRC 6015(c).

25.15.3.7.2.1  (03-08-2013)
Steps to Allocate

  1. The following is a seven step approach to allocating understatements between the joint and several liability and each spouse individually. In general, items for which the RS is granted relief are re-allocated from the joint liability to the NRS individually. Items for which relief is not granted remain part of the joint and several liability. The seven steps are summarized in the following paragraphs.

  2. Step 1— Determine the total deficiency for the joint return with all adjustments.

  3. Step 2 — Identify and allocate separate treatment items (credits and taxes other than tax imposed by IRC 1 or IRC 55). See IRM 25.15.3.7.2.2.1, Separate Treatment Items.

  4. Step 3 — Compute the total allocable deficiency:
    Joint deficiency (Step 1)
    -/+ Separate treatment items (Step 2)
    = Total Allocable Deficiency (Step 3)

    This is done in order to allocate income tax before credits and other taxes. Therefore, disallowed credit items are subtracted from the total deficiency. Other taxes increased are also subtracted from the total deficiency. When applicable, credit items increased and other taxes decreased are added back to the total deficiency.

  5. Step 4 — Allocate all adjustment items between the spouses. The allocation takes into account the following considerations, discussed in further detail below:

    • Actual knowledge bars relief for the item.

    • Fraudulent transfers invalidate election.

    • RS bears burden of proof for establishing the portion of deficiency allocable to them.

    • If the spouses filed separate returns.

    • Ignoring separate return limitations.

    • Tax benefit limitation.

    • When an understatement is due to fraud.

    • There is no relief for items attributable to RS.

      Note:

      A RS can obtain relief from his or her own item to the extent that the RS does not receive a tax benefit from the item and the item offsets the NRS's income. See Hopkins v. Commissioner 121 TC 73 (2003). In these instances, the Service must establish that the RS had actual knowledge to invalidate the allocation to the NRS, or the RS will be able to obtain relief.

  6. Step 5 — Compute the allocable deficiency for each spouse. This is the portion of the total allocable deficiency (Step 3) allocated to each spouse using the ratio of the adjustment items allocable to the spouse (Step 4) over the total of all allocable adjustment items.
    Adjustments allocated to the spouse (Step 4)
    x Allocable deficiency (Step 3)
    = Deficiency Allocable to a Spouse (Step 6)

  7. Step 6 — Compute the total deficiency allocable to each spouse. This is a two-step process:

    • In Step 1, the allocable deficiency is adjusted for Separate Treatment Items (See IRM 25.15.3.7.2.2.1, Separate Treatment Items. Essentially they are removed from the total deficiency in Step 2 and put back in at Step 7. The result is the Tentative Total Deficiency Allocable to Spouse.

    • In Step 2, the Tentative Total Deficiency is adjusted for any change to EITC.
      Deficiency allocable to Spouse (Step 5)
      =/- Separate Treatment Tax Items (Step 2)
      = Tentative total deficiency allocable to Spouse
      + Adjustments that decreased EITC
      - Adjustments that increased EITC
      = Total Deficiency Allocated to each spouse

    Note:

    The total of the joint liability plus each spouse’s allocated individual liability should equal the total deficiency before any allocation. In this step, adjustment is made for any change to EITC. While EITC appears as a separate adjustment on a transcript, it is included in the legal definition of a deficiency. Therefore, it has been incorporated into Step 7 in allocating the total deficiency.

  8. Step 7 — Consider Exceptions and Special Rules (See IRM 25.15.3.7 Special Rules and Exceptions). Adjustment is made for items that affect the deficiency such as:

    • Tax Benefit

    • Disqualified Assets

    • Household Employment Taxes

    • Child's Liability

  9. The TC 240 penalty should be allocated based on how it was originally assessed and what the RS is being relieved of. To do this:

    1. Determine what the original TC 240 was assessed on.

    2. If the amount of tax you are relieving the RS of had the TC 240 assessed, abate the TC 240 for that portion.

25.15.3.7.2.2  (05-01-2005)
Special Rules and Exceptions

  1. The following is a discussion of the special rules and exceptions indicated in Steps 2, 4, 6 and 7.


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