Thomas Wechter
IRS removes two-year deadline for requesting equitable innocent spouse relief

The IRS removed the two-year limitation period for equitable innocent spouse relief claims and highlighted the role of spousal abuse and financial control in the determination.

March 8, 2012
by Thomas Wechter, J.D., LL.M.

As a result of the continual efforts of the national taxpayer advocate and the possibility of congressional action in response, the IRS gave up on the two-year limitation period for requesting innocent spouse equitable relief and issued new guidance expanding the factor of spousal abuse and financial control in determining whether equitable relief is warranted. It took National Taxpayer Advocate Nina Olson to admit that the treatment of an innocent spouse by the IRS in a recent Tax Court case (Stephenson, T.C. Memo. 2011-16) “has made me ashamed of the IRS.” (Stokeld, “Taxpayer Advocate Blasts IRS’s Handling of Innocent Spouse Case, Calls for Change,” 130 Tax Notes 554 (Jan. 31, 2011)).


The innocent spouse provisions were designed to alleviate the harshness of the joint and several liability that results from a jointly filed return. The current innocent spouse provisions of Sec. 6015 were enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, to make relief easier. Three avenues of relief are provided.

The first avenue provides spousal relief from understatements of tax attributable to erroneous items of one spouse, if the spouse requesting relief did not know and had no reason to know of the understatement and it would be inequitable to hold that spouse responsible for the understatement. Relief under this avenue is available only for understatements of tax, not underpayments, and the request for relief must be made within two years of the first collection action by the IRS (Sec. 6015(b)).

The second avenue of relief is available if the spouse requesting relief is divorced, legally separated, or has been living apart from the other spouse for more than 12 months. Essentially, the joint return filed by the spouses is undone, and each spouse is liable for a portion of the deficiency. Relief under the second avenue depends on the spouse requesting relief having no actual knowledge of the item that gave rise to the deficiency (as opposed to not knowing or having reason to know, the standard for relief under Sec. 6015(b)).  As required under Sec. 6015(b), relief under Sec. 6015(c) must also be requested within two years of the first IRS collection activity.

The third avenue of relief, commonly referred to as “equitable” innocent spouse relief, provides for relief for underpayments and understatements when “taking into account all the facts and circumstances, it is inequitable to hold the individual liable … and relief is not available” under the other two avenues of relief (Sec. 6015(f)). This avenue of relief, according to the congressional history, was created as “a safety-valve provision for innocent spouses who fall through the cracks” in the other two avenues and did not provide for a limitation period on filing a request.

The provisions also directed the IRS to promulgate procedures by which equitable relief may be granted. The IRS did so by issuing Rev. Proc. 2000-15 (superseded by Rev. Proc. 2003-61), and by issuing regulations in 2002, both of which imposed a two-year limitation from the date of the first collection activity for the request of equitable innocent spouse relief under Sec. 6015(f), even though the statute provided no such limitation.

Case law background

The first case to focus attention on the two-year limitation period in the regulations was Lantz, 132 T.C. 131 (2009), where the taxpayer’s husband was convicted of mail fraud and owed approximately $1 million in taxes, which he said that he would settle and request innocent spouse relief for his wife. The husband died before requesting relief. The IRS denied the wife’s request for equitable relief as untimely. The Tax Court held that the equitable innocent spouse provision was not ambiguous and, therefore, the regulation imposing a two-year limitation period was invalid. The IRS appealed the decision to the Seventh Circuit, which overturned the Tax Court (Lantz, 607 F.3d 479 (7th Cir. 2010)). Lantz was one of several cases where the taxpayer won in Tax Court but lost in the Court of Appeals (see Mannella, 631 F.3d 115 (3d Cir. 2011), and Jones, 642 F.3d 459 (4th Cir. 2011) (Tax Court decisions declaring the regulation invalid reversed on appeal)).

National taxpayer advocate’s fight

The national taxpayer advocate stepped into the dispute and in her annual reports to Congress advocated the repeal of the two-year limitation period in the regulations. Beginning in her 2006 Annual Report to Congress, Olson recommended making it explicit that an innocent spouse may request equitable relief at any time before the expiration of the statute of limitation on collection, i.e., 10 years, and requested legislation to that effect. At one point, she was quoted as asking the IRS about its enforcement of the two-year limitation: “Is this the case you want to go to the Supreme Court? A taxpayer represented by a low-income tax clinic, is a victim of domestic abuse, and the IRS is sticking it to them? Is this the story you want of the kinder, gentler IRS?” (White, “Taxpayers Face Hardship Over Time Limit for Innocent Spouse Claims,” 131 Tax Notes 453 (May 2, 2011)).

Olson appealed to Congress to repeal the deadline and, in response, legislation was introduced to repeal it. In addition, a number of Democratic lawmakers sent IRS Commissioner Douglas Shulman letters urging the IRS to reconsider the regulation’s limitation period. In response to the national taxpayer advocate’s pressure and the possibility of legislation, the IRS issued Notice 2011-70, which provided that it would no longer require innocent spouses to request equitable relief within two years of the first collection activity.

Notice 2011-70

Until the regulations are modified, Notice 2011-70 provides that:

  • Equitable relief requested after July 25, 2011, must be made within the limitation period on collection or for any credit or refund of tax within the period of limitation for requesting a refund.
  • Pending or suspended requests as of July 25, 2011, will be reviewed even if submitted more than two years after the first collection notice as long as the initial request was made within the applicable limitation period on collection or, if applicable, within the period applicable for obtaining a refund or credit.
  • Requests that were denied merely because they were untimely and were not litigated may be made again. The IRS will treat the original request for equitable relief as a claim for refund for purposes of the limitation period. What this means is that any amount for which a refund was available as of the date the initial request was filed and any subsequently collected amount may be eligible for refund if the IRS decides that the request for equitable relief was warranted. With respect to any unpaid liabilities, a new claim must be made within the limitation period for collection.
  • The government on the day of the notice will file motions to dismiss all appellate cases affected by the change of the two-year regulatory limit. As a result, all of these cases have been dismissed.
  • For those cases in which the IRS stipulated that relief would have been granted if not for the two-year rule, the IRS will not take further action to collect the unpaid liability, but no refunds or credits will be available for the paid portion.

On Jan. 5, 2012, the IRS released Notice 2012-8, revising the factors to be used to determine whether equitable relief is warranted. The most important change is how the IRS will treat spousal abuse, fear of retaliation, and spousal control of household finances. If, because of abuse, fear of retaliation, or control of the household finances, a spouse could not question the treatment of items on the return or the payment of taxes due or challenge the other spouse’s assurance of payment, then the knowledge or reason to know factor will weigh in favor of the spouse requesting equitable relief, whether or not that spouse had knowledge or reason to know of items giving rise to the deficiency or the other spouse’s intent or ability to pay the taxes due.

In addition, the new guidelines use federal poverty guidelines to provide minimum standards based on income, expenses, and assets to determine whether the spouse requesting relief would suffer economic hardship if relief were not granted. Also, the lack of a finding of economic hardship would not weigh against relief. Finally, the rules provide for a streamlined determination for those spouses who meet certain prerequisites, but do not explain how the IRS would administer such a determination.


The shift in the IRS position on the two-year limitation period and the recognition of spousal abuse and financial control by the other spouse in the determination of equitable relief are certainly welcomed. The only question is why equity for these innocent spouses was so late in coming. Taxpayers and tax practitioners should extend thanks to National Taxpayer Advocate Nina Olson, whose tireless efforts brought equity to those who most deserve it and brought to the IRS’s attention the role that spousal abuse and financial control play in determining the innocence of a spouse.

Thomas R. Wechter, J.D., LL.M. (Tax), is a partner with Duane Morris LLP in the Chicago office and concentrates his practice in tax planning for individuals, corporations and partnerships and in tax controversy matters in front of the IRS and before the Tax Court, U.S. Court of Federal Claims and the District Courts.