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IRS Proposes Significant Changes to ‘Innocent Spouse Relief’ Regulations

At Brunoro Law, we often counsel clients on the complexities of “innocent spouse relief,” which is a defense available in certain circumstances to protect spouses from the penalties and punishments of tax fraud if the spouse truly was not aware that his or her partner filed a fraudulent tax return. The defense is not available in all scenarios, and recent proposed amendments to the rules may make it even more difficult to invoke this argument in upcoming tax matters.

One of the major issues under review (and possibly ripe for change) is the application of a legal concept known as res judicata to prevent spouses from claiming innocent spouse relief in “late-in-the-game” proceedings. In other words, the IRS has historically required innocent spouses to make their claim at the outset of the tax debt proceedings, or the defense was considered waived.

There exists a loophole to the res judicata waiver, however, in which a spouse who did not participate in a “meaningful way” in the early proceedings, was therefore not able to actually invoke the defense from a practical standpoint. While helpful, this exception has been notoriously difficult to interpret in terms of what constitutes “meaningful” participation. Under the proposed changes, the IRS would list a set of factors — which have not been yet publicly revealed — that would help U.S. Tax Court judges determine if the spouse’s early participation was, in fact, meaningful.

Further, the proposed changes would allow for relief from penalties and interest against innocent spouses if the underlying tax debt has been paid in full. As it stands now, penalties and interest are not considered separate from tax underpayment, so an innocent spouse cannot seek relief from such penalties and interest even if relief from the underpayment debt is denied. That is, unless one or both spouses is able to meet the debt obligation prior to seeking relief from the applicable underpayment fines and penalties.

For more information on state or federal innocent spouse relief, please contact an experienced and skilled tax attorney.

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