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The Color of Money

The IRS finally adopts some common sense with the innocent-spouse rule

By Michelle Singletary
July 28, 2011

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A recent Internal Revenue Service policy change shows an agency many people fear and loathe can also make common-sense decisions.

Effective immediately, the IRS will eliminate a ridiculous two-year limit that applied to a certain type of “innocent spouse’’ relief request. An innocent spouse is a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability.

The policy change will apply to people who file future claims as well as to some taxpayers whose claims were rejected in the past.

“It was the right thing to do to give as much a window as possible to allow people to come in and ask for that relief,’’ IRS commissioner Doug Shulman said.

You have to meet several conditions to qualify for the relief, which relieves you of responsibility for paying tax, interest, and penalties if your spouse did something wrong on your joint tax return. One condition: You have to establish that you did not know, and had no reason to know, there was an understatement of tax.

Under a provision called separation of liability, the IRS essentially allows the innocent spouse to pay the taxes he or she is responsible for and then pursues the other spouse (or former spouse) for his or her understatement of taxes, including interest and penalties.

Or you can try for equitable relief, which is a sort of catchall provision that allows the IRS to consider additional factors. For example, you did not know your spouse misappropriated money intended to pay your joint tax bill for his or her benefit.

The law that set up the innocent spouse and separation of liability provisions mandated that taxpayers apply for relief within two years. The law did not make that same requirement for equitable relief requests. The IRS, however, under its rulemaking authority, decided to apply the two-year window to the equitable relief provision.

But what if a spouse was being bullied, and was too afraid of her abuser to take action? It didn’t matter. She had to file within two years or was out of luck.

Many saw the injustice, especially in regard to victims of domestic abuse, and began to pressure the agency to get rid of the two-year window.

Nina Olson, the national taxpayer advocate, made elimination of the two-year rule one of her top recommendations to Congress. “Many individuals who otherwise qualified for equitable innocent spouse relief had no idea the IRS had initiated collection activity because the other spouse had concealed that information,’’ Olson said.

The IRS gets about 50,000 innocent spouse requests every year. About 2,000 requests a year filed under the equitable relief provision are rejected because of the two-year limit. The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered.

Michelle Singletary can be reached at singletarym@washpost.com.