IRS Eliminates 2-Year Limit on Innocent Spouse Requests

The Internal Revenue is granting relief to people who have been burdened with the old tax debts of their estranged spouses by eliminating the two-year limit on requests for innocent spouse relief.

The change in policy that the IRS announced Monday came after requests from the National Taxpayer Advocate, Congress, taxpayers and practitioners (see Senators Urge IRS to Extend Time for Innocent Spouse Relief and Taxpayer Advocate Warns Against IRS Budget Cuts). Innocent spouse relief is available only to someone who files a joint return, and is designed to help 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.

“In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief,” said IRS Commissioner Doug Shulman in a statement. “This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future.”

Earlier this year, the IRS initiated a review of the equitable relief provisions of the innocent spouse program, and decided to make changes in both the policy and the program. The IRS said those changes would become fully operational this fall and additional guidance will be issued. However, as of Monday, July 25, with respect to expanding the availability of equitable relief, the IRS said it would no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired.

Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

The IRS said it would not apply the two-year limit in any pending litigation involving equitable relief. Where the litigation is final, the IRS said it would suspend its collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70, posted Monday on IRS.gov.

The earlier regulations that were adopted in 2002 required that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while the evidence remained available. The IRS plans to issue formal regulations formally removing the two-year time limit.

National Taxpayer Advocate Nina Olson welcomed the change in policy. "The new policy the IRS announced today is one I have recommended and strongly support," she said in a statement Monday. "The prior policy required that claims for equitable innocent spouse relief be brought within two years from the date of the first IRS collection activity. In practice, 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. As a consequence, it was impossible for these individuals to bring a claim for relief before the two-year deadline to obtain consideration of the merits of their claims."

However, the IRS added that by law, the two-year election period for seeking innocent spouse relief under the other provisions of Section 6015 of the Internal Revenue Code continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

Publication 971, Innocent Spouse Relief, has more information about the innocent spouse program.

Several members of Congress hailed the IRS's move. "This is a huge victory that removes an arbitrary obstacle for innocent spouses, primarily women, and helps us move toward a more equitable tax system," said Rep. Pete Stark, D-Calif. "I'm very pleased that the combined efforts of our letter to Commissioner Shulman and the tireless work of National Taxpayer Advocate Nina Olson have led to this positive result."

"I applaud the Administration for reviewing the innocent spouse rule and revising it in favor of stronger taxpayer protections consistent with Congress’s original intent." said Rep. Jim McDermott, D-Wash. "It is critical that taxpayers who are the victim of fraud are given the strongest protections possible under the law. Today’s decision is a victory for fairness and will provide innocent taxpayers with enough time to seek the relief that they deserve."

In April, Stark and McDermott sent a letter to IRS Commissioner Shulman signed by 47 of their Democratic colleagues, including all of the Democrats on the House Ways and Means Committee.

Senator Chuck Grassley, R-Iowa, also praised the IRS's announcement. “Those of us behind the IRS overhaul enacted in 1998 never intended to put a deadline on innocent spouses," he said. "We were trying to help innocent spouses as a matter of fairness. These taxpayers never should have been put in the position they were put in by the IRS. It’s very good news that the agency has seen the light regarding congressional intent and innocent spouses deserving relief.”