What is innocent spouse relief? What is injured spouse relief? What’s the actual difference between the two?
These are common questions that we get in our tax resolution CPE classes. Watch the following high level overview of innocent and injured spouse to learn the difference and apply them to help your clients.
Note: This was recorded in November 2015 based on Internal Revenue Code and IRS policies in place at the time. Practitioners should seek out the latest changes to the code and IRS procedures in effect today. For the most up to date version of this class, enroll in our tax resolution specialist training program and become a Certified Taxpayer Representative™.
Unedited Transcript
Note: This is a raw, unedited transcript of the recording that was produced with an automated transcription tool, not a human transcriptionist. It’s provided merely for reference and to help you find specific sections of the video you might want to jump to.
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Our course objectives today are to define the difference between innocent and injured spouse relief. This is a very commonly, very commonly messed up thing, even amongst practitioners understanding the difference between between the two.
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You know, for practitioners, it can be difficult. We’re also going to look at the injured spouse procedures. We’ll look at various innocent spouse provisions and rules, including some things that you don’t commonly hear about. We’ll go in-depth on Form 88 57. And then finally, we’ll discuss appeals procedures for innocent spouse relief. So what is the difference between innocent and injured spouse relief?
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So like I said earlier, this very commonly confused, so injured spouse, this is when one spouse is, quote unquote, injured by federal offsets of the other spouse’s sole liability. Remember, if they’re filing married, filing jointly on their 10 40, then they are jointly liable for jointly and separately liable for the tax obligation. However, there are cases where one spouse has a debt that can be satisfied through the federal offset program.
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The most common situations where this occurs are unpaid child support debts to various federal or state agencies and separate tax liabilities.
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For example, if one spouse has a tax liability that was incurred prior to the marriage or if a one spouse owns a business and there was an employment tax situation that generated a trust fund, recovery penalty trust fund, the recovery penalties are only against one person. It is not a joint liability. So if aim a let’s say one spouse owns a trust fund recovery penalty and they file a joint return and they get a refund or their due a refund. Well, because one spouse owes the trust fund recovery penalty, the IRS is going to seize that entire refund.
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Now, if the other spouse would have otherwise been do a part of that refund based on their own income, then that is an injured spouse situation because they’re part of the refund was seized to satisfy the other spouse’s trust fund, recovery penalty.
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OK, this is where injured spouse comes in. So under Internal Revenue Code Section 64 02, that’s the federal offset program, the injured spouse program provides relief from those offsets. So that’s injured spouse. And the way that I that I use to remember this is that they’re injured in in terms of their money was taken when they never had an obligation to pay whatever the other spouse was being offset for. OK, so they were financially injured by the seizure of the refund?
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Yeah, that’s that’s how I remember it. Let’s take a look at innocent spouse, where when a married couple files a 10 40 filing jointly, that obviously creates a joint liability. It is a joint and separate liability. So each spouse is individually liable for the entire liability and they’re also jointly liable for the full thing.
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OK. The Internal Revenue Code specifically states that each spouse is wholly responsible for the accuracy of the return as well. They are also responsible for penalties and interest. So tax penalties, interest are the responsibility of both for the entire dollar amount. No innocent spouse relief has existed in the code for quite some time, however, the Roar 198, the IRS Restructuring and Reauthorization Act of ninety eight, it expanded relief and created three distinct categories that we’ll talk about later.
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IRS 60 15 didn’t exist prior to the roar of ninety eight.
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So the whole purpose of innocent spouse relief, which by the way is is a more difficult process than injured spouse relief. And your spouse relief is pretty straightforward because there was a tax liability or child support obligation or state liability, something out there that was the responsibility of one spouse that was clearly not the responsibility of the injured spouse.
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They’re pretty clear cut. Innocent spouse, on the other hand, is a lot more difficult. It’s a much lengthier process, it’s a much lengthier form, and the reason for that is because under the law, each spouse is jointly responsible. They’re equally responsible for the entire tax liability of the marital unit. OK, so we are asking the government to create a separation of that joint liability. Now, remember, from a business perspective, a collections perspective, doing this is not generally in the best interest of the government.
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So look at it from their angle. This is something that they don’t want to do. All right. However, Congress recognized the fact that there are many legitimate situations where they need to be a little bit more lenient on this. So that is why these provisions were added in Internal Revenue Code Section 60 15. In order to apply for either program, like everything, there is a form. So for innocent spouse relief, you will file form eight eight, five, seven and four injured spouse relief, you’ll file Form eight three seven nine, which is basically nothing more.
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Than an allocation worksheet divvying up the income and the withholding in payments that were turned over to the government so that you can get an allocation of how much of the the refund would have been allocated to the injured spouse. It’s a pretty straightforward process. So the other thing to keep in mind here, and this is kind of a practice management thing for you, if you have an active form twenty eight, forty eight power of attorney for a client in this situation, you can complete and sign either of these forms.
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The taxpayer does not need to sign these if you have an active power of attorney. So let’s talk about injured spouse procedures. Remember, injured spouse is when a federal offset of a refund or overpayment is applied to the some sort of a liability of one spouse that’s not owed by the other.
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So this requires that we talk a little bit about the federal offset program. Injured spouse claims arise directly as a result of federal offsets. If you’re not familiar with the offset program, offsets are nothing more than interceptions of refunds, overpayments. Or payments, what I didn’t put on the slide was that offsets can also be in the form of Social Security. OK, up to 15 percent of Social Security payments can be subject to the federal offset program in the same way that refunds or overpayments are if you are a government contractor.
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Your payments under that government contract can be subject to the federal offset program, so if you.
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Have a an individual consulting contract with some federal agency. OK, the and you owe a federal tax debt, a child support obligation. Well, the Treasury. Can. Take payments that they would otherwise send to you under your your federal contract and apply those to these other obligations. So overpayments are first applied to federal tax debts and this is all federal tax debts. And even within this, there is a priority order. For example, trust fund obligations go first.
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So if you have a refund or a federal payment of any sort that’s coming to you and you owe an obligation, federal tax debts take top priority. After that, you have unpaid child support. That is the second priority in the allocation after federal tax debts. And then the rest of these are not in priority order. But if you, for example, received an excessive unemployment compensation amount, then that can be paid back to the government through the federal offset program and then, of course, state tax debts and other Treasury offset program obligations.
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So this is where the entire problem about injured spouse originates. So some some procedural things for you to keep in mind, No. One, it’s really best to contact the IRS before an offset occurs.
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I don’t you know, I’ve been doing this for seven years and I have never had an injured spouse situation where they didn’t know about it. OK. And if if there is an unpaid child support obligation, if there is a federal tax debt, they know about it, OK, there are notices that are sent. There are probably court proceedings that came about. You know, I’ve never seen a situation where it wasn’t already know. So the thing to keep in mind here is that you can file for the injured spouse allocation with the 10 40 return, OK, so.
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If if there is a chance there to be a federal offset, the the unit of the Treasury Department that handles this is the bureau official start service, they’re going to send a warning letter saying, hey, you owe child support. We’re going to take your tax refund. Take that warning letter comes with a copy of form eighty three. Seventy nine and it’s instructions, OK. So the best way to avoid a problem down the road is simply to include the former three seventy nine with the return, and then if there is an ongoing obligation, like if there’s a large trust fund, recovery penalty, for example, where I’ve more commonly seen this with what I do, the simple thing to do is to indicate injured spouse on any new 10 for the return put it is a put it is a comment in an E file, a filing, a paper return.
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Put it just write it across the top of the return injured spouse. OK, so that it is flagged in the system. If you e file a return with the eighty three seventy nine attached, it will accomplish the same thing and it will help to prevent the federal offset or or the portion of the federal offset that should be attributable to allocated to the injured spouse. According to the Internal Revenue Manual, the processing time for a return with an eighty three seventy nine attached is approximately 11 to 14 weeks.
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Now, if you’re not filing the injured spouse request with the return, but rather after a refund has already been seized, then file film, I should say, file file form eighty three, seventy nine.
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And the IRS has to wait forty five days. In my experience that forty five days is pretty conservative after forty five days. Call, call, call again. They’re going to tell you to wait some more.
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The Customer Service Representative Training Manual, the section of the ihram that the customer service reps at the IRS use to do their job. They are told to tell you to wait 30 more days. That’s what they’re told to tell you in their manual.
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Normally, I I see, you know, eight weeks is about right, OK, so 60 days is probably going to be a more realistic processing time.
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Now, also, like I said, if you can file the eighty three, seventy nine with the ten forty, that really is the best way to do it. And yes, as Katherine pointed out in chat, yeah, you can totally do that now it’s I the the what three or four tax prep softwares that I’ve tested out last year before before choosing one. All of them that I looked at included the eighty three seventy nine. None of the commercial tax prep software that I tried out did not have it.
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So they all should have the ability to file you file the return e-filing three seventy nine with the return. OK, Howard, you note. If you don’t file the eighty three, seventy nine with return or a refund occurs because they didn’t know about the problem and it comes up later and you’re on the phone with the IRS.
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The customer service representative may tell you, oh, you need to mail in the form separately, OK, and that’s bogus information. You can fax the eighty three seventy nine directly to the customer service representative. OK, and if you have a power of attorney, you can sign it. All right. So you fax the customer service representative, a copy of your Twenty Eight Forty-Eight and the completed eighty three. Seventy nine. Those are processed. All right.
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Do not let a customer service representative at the IRS tell you that it’s non possible. It specifically states in the ihram that they have to accept except those faxed 83, 79. OK, this one tip alone can save you a ton of time. So if nothing else out of the slide, I hope that you get you can fax them in when you’re on the phone with the customer service rep and you can file the eighty three seventy nine along with the ten forty.
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Those two things will save you a lot of time when you’re working with clients.
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So now let’s talk about innocent spouse relief. This is the much bigger topic than the injured spouse relief. They came on the the Internal Revenue Code did contain some innocent spouse provisions prior to the war of 98.
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The. The thing that rah rah did is that it it streamlined the process, first of all, it it made things a lot clearer. And by adding Internal Revenue Code Section 15, it gave us three different avenues that we can take for obtaining innocent spouse. So section so paragraph B of Section 60 15 provides for relief from deficiency. So this is the the general broader, you know, historically as we know it, version of innocent spouse relief. But it also created 60, 15 paragraph C, which is the separation of the liability, so being able to actually separate the liability post assessment, that’s important.
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Post assessment is is important. We’ll talk about that more. The separation of the liability under 60 15 C is particularly of interest in community property states. And as was mentioned over in chat, yes, the IRS does have to apply state community property laws to. Innocent spouse relief situations, and when I was putting this presentation together, I debated getting into the community property stuff, but the reality is we could spend an hour just talking about that. It’s a very in-depth and involved subject.
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So that’s something I’ll do on a future presentation. But keep in mind that it is a factor. And this separation of liability provision comes into play in these community property situations. And in Section F of 60, 15 provides what’s called equitable relief.
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This is the the this is the effective tax administration equivalent from the often compromised world to the innocent spouse relief world. Equitable relief allows the IRS discretionary granting of relief after collections activity has already taken place. So you could look at it in kind of a way as almost an injured spouse, sub provision under innocent spouse relief because equitable relief provides for refunds after collection. And then you’ll see here, I did put in the brief thing about community property states, married taxpayers in community property, states that file separately may still be liable for a spouse’s tax debt under state law.
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OK, so if you live in one of the community property states, it behooves you very, very much to understand your state laws in regards to married filing separately situations, not just married, filing jointly situations.
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And a lot of tax professionals I talked to in community property states don’t, you know, are very familiar with the married filing jointly provisions. But they some of them are not aware of this married filing separately provision. So be sure you take that into consideration if you live in a community property state and you should research that.
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So there are time limits for filing for innocent spouse relief if you are filing under the the more standard provisions, not the equitable relief provision, you must file your request within two years of whatever collection activity you are requesting relief from.
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So where this is really going to come into play for a a a practical scenario, the.
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The the IRS is going to send out its normal notice cycle right on on a on a tax obligation, on a tax return. So that is the start of the collection. Activity, so when you get that first twenty one day letter that starts the IRS collections cycle and. You know, if you filed the return that is being collected upon, then hopefully your client will come to you with that letter saying, hey, look, they’re coming after us for the money.
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And they’re they’re telling us, you know, we both have to pay it.
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So if they can’t pay the obligation and there is going to be an innocent spouse situation, then you as a practitioner, it behooves us. It’s just good customer service for us to be really on the ball in terms of saying, hey, you know, we need to get on this innocent spouse thing now. So keep that in mind that there is a time limit on this for the equitable relief provisions. This is after your money has already been paid over.
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Refunds have already been offset. Your payments have already been made. The debt’s already been paid off.
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Even if you’re requesting innocent spouse relief under equitable relief, which is provision if this is a different time period, OK, the are said the the refund statute expiration date and the see said the collection statute expiration date. The innocent spouse relief must be applied for within. Either of those two periods. OK, so if you’re requesting a you know, if you’re basically remember S.F., it’s a claim for a refund is what it is. OK, so your two year limitation on a claim for refund, that’s the R said it applies innocent spouse situations.
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Right. And then also a note, if you are applying for relief under under the allocation section, which is 60, 15 C, no refunds are allowed when you’re using that allocation.
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Alexion a question and shout What was the twenty one day letter. The 21 day letter also called The Snod for short, the statutory notice of deficiency. This is the it’s the initial bill, but they send you OK. It is not the clean notice. The six, six, eight. Why the notice of federal tax lien will come, you know, several, a couple of months later. But the twenty one day letter is the you know, is the the here’s your bill demand for payment.
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And the reason is called twenty one day letter is that in the vast majority of situations the the service will grant you a twenty one day leniency period to pay the obligation. In order to avoid penalties and interest, additional additional penalties and interest on that. So if you can pay it within 21 day period, then the taxpayers save some money. So that’s why I told the 21 Daylor. Let’s talk about collections action in regards to innocent spouse cases once you file for innocent spouse relief.
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The the IRS is is barred from taking their normal collections action, OK, this means they can’t levy. This means that. They they can’t initiate seizure proceedings, you know, all the normal things that the collections division does. Is halted. During the review period, with some exceptions, there is a form Form 870 I, which is the waiver of collections restriction, innocent spouse cases in my seven years of doing collections representation. I have never, ever, ever, ever, ever, ever allowed a client to sign Form eight.
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I’ve never seen it. I’ve never seen to be necessary. I could I can envision situations where it could be a negotiating tool, which is what we commonly do over on the trust fund recovery penalty side. It’s very common to sign a waiver of the three year assessment statute limitation for for assessment of the trust fund recovery penalty in order to get a in in business trust fund installment agreement. But for a 10 40 case, I mean, there’s there’s nothing that I’ve ever seen that’s that’s sufficient to warrant this.
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So be very, very cautious in allowing your clients to sign this. Collections action is also barred during the statutory 90 day tax court petition period.
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So there are various situations that incur this 90 day review period where you can file a tax court petition after that 90 days expires. Then like, for example, on the the denial of innocent spouse relief, there is a tax court petition period. After that expires, then collections action can resume. If there is a Docketed Tax Court case, then collections action is barred until after the judge declares makes a final decision and declares the tax court case closed after immediately after that transaction can continue.
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Now, as a point of IRS policy and procedure and not law, these these bars against collection action, these are statutory.
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But as a matter of procedure, the IRS will not pursue collections after a tax court appeal is filed unless. The sea said is coming or it is a Jeopardy situation, OK, and talking about Jeopardy situations is beyond the scope of today’s presentation. But if a revenue officer or group manager determines that it is a Jeopardy collection situation after a tax court decision is finalized, but the taxpayer is already notified, the service, they’re going to appeal. The revenue officer will pursue collections, action in jeopardy situations, or if a season that is fast approaching, but except for those two situations, as a matter of procedure, the IRS instructs Oros not to pursue collection after a tax court decision.
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If the taxpayer has notified them, they’re going to file an appeal.
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So the other thing to keep in mind is that during the day for day, during the entire period of an innocent spouse review process, plus an additional 60 days, the collection statute expiration date is extended day for day during that review period until the review is closed.
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All right. So we call this tolling the see said. So if the collection statute expiration date is five years away and the innocent spouse case is open for four months, well, the collection statute expiration date will now become five years and four months, plus an additional 60 days. So it becomes five years and six months. OK. So just like an offer in compromise application or a CDPR appeal, innocent spouse requests are one of those things that extend the time, the statutory time period that the IRS has to collect on the liability.
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Now, a couple of quick things that don’t get talked about a whole lot, so I wanted to cover them. There are situations where a a spouse forges a signature on a tax return. We all know this happens. A lot of times it is in order to prevent the spouse from finding out about some sort of financial impropriety because they don’t want to jeopardize the marriage. Right. There are other situations where a tax return is signed under duress and signatures that are made under duress, courts have held that those signatures are are invalid.
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And the thing to know here is that in these situations, the innocent spouse provisions of Internal Revenue Code Section 60 15 don’t actually apply because the the the other spouse didn’t actually sign the return with intent.
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And so the courts have held that that, you know, under duress or forgery situations, the tax return itself is invalid and therefore the joint liability was never actually created. OK, so what happens here is that the return itself is reversed. And you’re going to want to prepare a married filing, separate return. And yes, as Lucia pointed out in chat, yeah, it’s hard to prove, especially with E file, and this is very much an area of concern.
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This is definitely part of it’s one small part of the broader information security issues, the return for return preparer, fraud, identity theft. You know, it’s definitely within that arena of concern for the service and for taxpayers.
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So the thing to keep in mind here is that these cases are still handled by the Cincinnati centralized innocent spouse unit. So all correspondence, questions, et cetera, should all still be routed to Cincinnati, even though the innocent spouse rules technically don’t apply because the return itself becomes overturned. But Cincinnati still handles these cases. Another quick situation that you may encounter, I’ve seen several of these in my career, is where one spouse files an offer and compromise, but didn’t include the name and Social Security number of the other spouse.
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Where I most commonly have seen this in my practice is in trust fund recovery, penalty representation cases.
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So what can sometimes happen before before I pick up the case, before the client comes to me, they will have already filed an offer and compromise thinking it was the right thing to do because they had a trust fund recovery penalty that was already assessed. And in case you didn’t know this, yes, you can compromise trust fund obligations. So they’ll file the OIC on the trust fund recovery penalty, the six, six, seven to assessment. And then they’ll go, oh, hey, I owe X dollars in personal income tax liability also, so I’m just going to put that on the offer and compromise application as well.
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But they only do it in their own name with their own Social Security number, because if you read the the the the instructions for filing it for trust fund recovery penalty, that’s what it tells you to do, OK? And then then they just check the box for the 10 40 also, but they leave the other spouse off, OK. And then if that offering compromise gets approved, guess what. That spouse is now off the hook for the 10 40 liability.
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But because it is a quote unquote, joint and several liability, the other spouse is still on the hook. So there are two solutions to this situation. One is innocent spouse relief application. The other is for the other spouse to file their own offer and compromise.
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The the the the faster way to do this is through the innocent spouse side, not the offering compromise side.
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OK, the much of the information, as you’ll see on the form here in a minute, are are largely the same. But the process, for instance, spouse relief is a lot faster not to wait around for six to 12 months waiting for an offer to be approved. So in this kind of a situation, apply for innocent spouse relief and the the argument to be made with innocent spouse relief is simply while the my my spouse was granted offer and compromise relief for the joint liability and we’re in the same household.
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Therefore, I should be granted innocent spouse relief for my liability on the obligation. OK, that’s the argument you make and that’s the argument that will will win. OK. So now let’s talk about form 88. Fifty seven. Four eighty eight fifty seven is the application for innocent spouse relief, and you know, what you’ll notice on this form is that it gets pretty personal and in fact, it starts to very quickly resemble a form for three a.
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So as a practitioner, if you are in an eighty eight fifty seven situation and you already have a form four thirty three a, it becomes very easy to carry over a lot of that information and then review with the client. It helps to accelerate the the process. So basically, the form asks about the requesting spouse’s involvement in the finances, the tax preparation process, things like that, in order to determine whether they’re eligible for relief and to what extent.
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Keep in mind that it is not uncommon for partial relief to be granted. The the service has discretion in in how they determine relief, and as we’ll see on the form, it gets pretty detailed.
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And they use that information to determine. How much relief to grant it’s not black and white, it’s not zero or all, it is definitely a continuum. And here is my note to myself to switch to screen mode, so let me go ahead and do that. So hopefully on your screen, you now see. The. Warm up here, request for innocent spouse relief. So some important things to consider. Up here at the top, it gives you the general warning signs we’ve already talked about the bar and collections, also some to keep in mind the IRS is required by law to notify the person online five, that the request, this relief.
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So if there is a a separation or divorce situation, the IRS is going to notify the other spouse that you’re applying for innocent spouse relief. OK, so, you know, just be aware and make sure your client knows that that’s going to happen. However, there, the IRS is prohibited from disclosing the requesting spouse’s current name, address, phone number or employer, and that is for domestic violence prevention, obviously.
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So let’s go really quickly through the form. So there’s a description of the situation, the taxpayer or you will indicate yes or no, whether the situation applies. If so, continue. There’s a quick question to determine whether or not they should actually file form eighty three seventy nine. Instead, I’ll ask about the taxpayers in question. I want to know your name address where you want to be contacted. They ask you for information about the spouse in the requesting relief from in regards to where they lived, et cetera, for the tax years.
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Relevant, relevant to the situation. And here’s where we get into the nitty gritty, this is all going into the determination of. Of whether you’re eligible for relief rent, they want to know when you were living together, when you were married, when you got divorced, they want copies of divorce decrees. They want to know what your level of education was. Now, remember that the purpose here is to allocate. The tax liability, basically, so they’re going to take into consideration your education level of the requesting spouse, what they did, how much money they earned.
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OK, those are considerations that the IRS contemplates when determining whether to grant relief. So they don’t know education. They want to know if there was a domestic violence situation and you can ask the IRS to consider this as part of their determination. Mental and physical problems, either at the time the return was filed or now that is a consideration, I want to know how the requesting spouse was involved with the finances and preparation of returns. Did you agree to file a joint return?
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Did you sign the joint return? You know, this is where we get into the the signing under duress or potential forgery issues. That’s where that’s going to come up. Part three. Tell us if and how you were involved with finances and preparing those returns and most situations are going to fall into one of these. Check the box categories, OK?
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You weren’t involved. You had nothing to do with it. You gathered stuff together. You didn’t know a joint return was filed. OK, these are all things that they take into consideration. I’m not going to go through every single one of these.
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A lot of these were were are self-explanatory for you when you’re going through it.
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Plus, we’re going to need crunching on on time here. Part three. Tell us how you’re involved in finances. Where was the questioning spouse, the money person in the family? Were there joint accounts, were there any large expenses, you know, trips, home improvement, private schooling, these get into some of the collections, financial standards that we offer that we refer to for form for thirty three A that are disallowed expenses. OK, so the IRS wants to know you have a tax liability.
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Did you go do something else extravagant rather than pay your tax bill? Did you take a two month vacation to Hawaii? Did you send your children to private school? Don’t forget, private school is is a disallowed expense in the IRS collections process. Did you buy a Ferrari, you know, instead of paying your taxes, now they want to know that transfer of assets, this is also a four thirty three, a question. If there was a transfer of assets and there was a federal tax lien, well, the asset transfer may be deemed inappropriate.
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They want to know what your current assets are and the fair market value, again, very for three Ayesh right. And this is almost straight out of the last page of four thirty three. They want to know about your income and your expenses and don’t for a second think that they’re not going to compare this information to the national standards because they do. And it is part of their determination, OK, if you’re living a lavish lifestyle and you’re requesting innocent spouse relief.
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Well, good luck with that, you know, this is that’s why they’re requesting this information. Part five is the domestic violence situation, there are specific provisions, especially related to, remember, 60, 15 paragraph F that allows the IRS discretion for granting innocent spouse relief. And one of the big things that they take into account for that is domestic violence experiences. For some clients, this can be a kind of a mentally taxing exercise to go through because guess what?
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The IRS wants copies of police reports, medical records, restraining orders, photos of injuries. And don’t forget that some of this information is also protected and regulated by HEPA. All right. So, you know, if you’re handling this information, keep in mind that you have HEPA privacy rules that you have to follow as well. You know, so the the the domestic violence, spousal abuse provisions, some of the Irish take pretty seriously. So if this is the situation your client is in and and, you know, they have the mental fortitude to to to pursue this, you know, even though it opens up some some some bad memories and the the non requesting spouse gets notified from a financial perspective, it may be worthwhile.
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So, you know, make sure you’re you’re advising your your clients on the financial benefit of doing this, even though it kind of opens up some some bad memories here. So that is the gist of the form. Keep in mind, with the power of attorney, you can sign this yourself, but do you remember it is signed under penalty of perjury, just like a form for thirty three a.
