On January 5, 2012, in Notice 2012-8, the IRS significantly modified the rules for spouses seeking Innocent Spouse Relief under Internal Revenue Code Section 6015(f), which is also known as “Equitable Relief.” Notice 2012-8 is effective immediately and supersedes the old rules in Revenue Procedure 2003-61. The IRS will evaluate all new and pending Section 6015(f), Equitable Relief cases under the rules in Notice 2012-8, even if the IRS already denied a pending case under the old rules.

According to Notice 2012-8, generally, the IRS will consider similar factors it considered in past years. These factors include marital status, knowledge, economic hardship, abuse, tax compliance, etc. The biggest changes Notice 2012-8 makes are to the definitions of each factor and the weight the IRS places on each factor when considering whether to grant Equitable Relief. Some of the rule changes include:

1.  The IRS is now considering the nonrequesting spouse’s control over financial affairs as a factor that can mitigate other factors that might otherwise weigh against granting Equitable Relief.

2.  The IRS is offering “streamlined” Equitable Relief for requesting spouses who can prove they meet the marriage, knowledge, and economic hardship factors as defined in Notice 2012-8. This provision is similar to the “Safe Harbor” provision of Revenue Procedure 2003-61, except definitions have changed.

3.  The economic hardship factor can no longer weigh against Equitable Relief. If the requesting spouse cannot show economic hardship, the factor is neutral.

4.  Economic hardship is more difficult for the taxpayer to prove. Now, if the taxpayer can partially satisfy the tax obligation as defined in Notice 2012-8, they cannot meet the economic hardship factor.

5.  In “underpayment” cases, the requesting spouse now must show that, at the time he or she signed the joint return, he or she reasonably expected the nonrequesting spouse to pay the tax liability at that time or “within a reasonably prompt time after the filing of the return.” We expect that the courts will help define what is a “reasonably prompt time.”

6.  The IRS will now consider abuse other than physical abuse when evaluating whether the abuse factor weighs in favor of relief.

7.  The IRS will weigh the requesting spouse’s legal obligation to pay the taxes. In the past, the IRS only weighed the nonrequesting spouse’s legal obligation. If a divorce decree holds the requesting spouse responsible for the tax obligation, this factor will weigh against the requesting spouse. If both spouses are responsible, or the divorce decree is silent, the factor is neutral.

8.  A requesting spouse cannot demonstrate that they did not receive a “significant benefit” if they enjoyed the benefits of a lavish lifestyle, such as owning luxury assets or taking expensive vacations.

9.  If the requesting spouse is still married, the compliance factor can only weigh in favor of relief if he or she files “Married filing separately” in future years and timely pays any obligations. If the married requesting spouse files jointly on a timely basis and pays all future obligations, the IRS will consider the compliance factor neutral.

According to the IRS , due to the Notice 2012-8 changes, more taxpayers who filed their tax return “Married filing jointly” status will qualify for Equitable Relief. Taxpayers who might not have been eligible for relief in the past should reevaluate the strength of their case under these new rules.

This is the tenth post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.

Taking No Action. Some taxpayers have the option of taking no action to resolve their outstanding tax obligations with the Internal Revenue Service. The IRS has ten years from the date of assessment to collect taxes subject to certain exceptions that can extend this ten years. The taxpayer may voluntarily pay these taxes, or the Internal Revenue Service may collect them through enforced collection procedures. Typical enforcement actions by the Internal Revenue Service are to levy wages and bank accounts. As a last resort, if a taxpayer will not be cooperative, the Internal Revenue Service will seize and sell the taxpayer’s residence. For those taxpayers who have no bank accounts, are self employed and therefore do not receive a weekly or monthly paycheck from a consistent source, and who do not have equity in real estate or other leviable assets, simply taking no action and waiting for the ten year Statute of Limitations to run may be a viable option. Be careful and alert to any notice you receive.

This is the ninth post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.

Innocent Spouse/Separation of Liability/Equitable Relief. IRC 6015. The tax liability on a joint return will often be the result of the conduct of just one of the spouses, but, unfortunately, because they filed a joint return, they are both presumed to be responsible. For example, a wife is an employee who is having taxes withheld while her husband has his own business and is required, but has failed, to pay estimated taxes, resulting in a significant liability of tax, penalty and interest. Normally, in this situation, they will both be responsible for the liability. However, there are some situations when one of the spouses to a joint liability will be deemed an “innocent or injured spouse.” There are three types of relief available for a spouse.

Innocent Spouse Relief.

Understatement. There is an understatement of tax attributable to erroneous items of one spouse filing the return; (Erroneous items include unreported income and incorrect deductions, credit or basis.)

Lack of Knowledge. The spouse establishes that in signing the return, she did not know (and had no reason to know) that there was such an understatement;

Fairness. It would be unfair to hold the innocent spouse liable for the deficiency, taking into account all the facts and circumstances. In determining if it is unfair to hold a spouse responsible for an understatement, the IRS considers many factors including:

i. whether the spouse received any significant benefit from the understatement of tax. Examples of significant benefits are expensive vacations, jewelry or clothing that exceed the innocent spouse’s normal lifestyle.
ii. Whether the “innocent spouse” was later divorced from or deserted by his or her spouse.If these conditions are satisfied, the innocent spouse may be relieved of the liability.Separation of liability. This type of relief allocates the understatement of tax based on the amount for which each spouse is responsible. To qualify for this option, the spouses must be either divorced, legally separated or not a member of the same household at any time during the twelve-month period before they request the separation of liability. Even if the spouse meets the above-mentioned requirements, the IRS can reject his or her request in the following situations:Fraud. The IRS proves that assets were transferred between the joint filers as part of a fraudulent scheme.Knowledge. The IRS proves the individual seeking relief had actual knowledge of any item giving rise to a deficiency not allocable to her (unless she signs the return under duress).Avoidance. The IRS proves the individual seeking relief transferred property to her spouse (or former spouse) just to avoid tax or the payment of tax.Equitable relief. If a spouse is not eligible for Innocent Spouse relief or Separation of Liability, he or she still may be relieved of the tax through Equitable relief. Simply stated, this means that taking into account all the facts and circumstances, it would be unfair to hold the spouse liable for the understatement or underpayment of tax. As discussed above under Innocent Spouse relief, the IRS will be looking for indicators of fairness like whether the spouse received any significant benefit from the understatement or whether the spouse was later divorced from or deserted by her spouse.

This is the eighth post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.

Offer in Compromise – Minnesota Department of Revenue. The starting point for an Offer to the Minnesota Department of Revenue is similar to the IRS. Determine the net quick sale value of the assets and the taxpayer’s excess monthly income. The Department will evaluate this information in light of the additional factors listed below. Some of these factors are also used by the IRS, but the Department is often more subjective in its evaluation, considering the taxpayer’s past bad conduct and evaluating the taxpayer’s payment ability over a longer period of time.

1. Age of the liability and whether the statute of limitations on collections will soon expire;

2. Employment potential of the taxpayer;

3. Age and health of the taxpayer;

4. Realistic potential for collecting the liability in full;

5. Other liable parties (spouse, partner, corporate officers);

6. Credit bureau report;

7. The make-up of the balance due (in other words, tax penalty, and interest);

8. Whether the liability is comprised of “trust taxes” (such as Minnesota income tax withheld by an employer or sales tax collected by a retailer);

9. Whether the taxpayer is current with filing all tax returns;

10. Previous collection action taken, past or current bankruptcy of the taxpayer, and the amount paid against the liability to date including any refunds that may have been applied;

11. Whether any doubt exists to the correctness of the liability;

12. Whether all or a portion of the liability would be discharged if the taxpayer declared bankruptcy;

13. In the case of a business liability, whether the business is open or closed;

14. Whether the Offer is the first Offer to compromise or a reconsideration of a previous Offer; and

15. Whether there are factors that would justify an abatement of penalty.

If the Offer is accepted, the taxpayer will receive an Agreement to Compromise setting out the terms and conditions of the Offer. If the Offer is denied, the taxpayer may request a reconsideration of the denial by the Minnesota Department of Revenue Taxpayer Rights Advocate’s office. However, if the Offer is not accepted by the Minnesota Department of Revenue or the Attorney General, there are no formal appeal rights. For more information about Compromise Offers with the Minnesota Department of Revenue, see the Department’s Collection Manual, Pages 30 through 32,

This is the seventh post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.

Offer in Compromise – IRS. The IRS and the MDR have the authority to settle, or compromise, tax liabilities by accepting less than full payment under certain circumstances. This post deals with the procedures established by the IRS.

Doubt as to Collectibility (DATC). IRM 5.8.1. An Offer in Compromise is precisely what the name implies. A taxpayer Offers to pay the Internal Revenue Service a portion of the amount it currently shows as owing, and, in return, the Internal Revenue Service will compromise and release the taxpayer from the entire liability. Obviously, the taxpayer must give the IRS something it does not already have to achieve a successful Offer in Compromise.

Forms 656, 433-A and 433-B. An Offer in Compromise is submitted on Form 656. With this Form, the taxpayer must submit a completed financial statement, Form 433-A for individuals and sole proprietorships, and Form 433-B for corporations or other business entities. With these financial statements, the taxpayer must submit verification as required in the Form, like copies of bank statements, pay checks, mortgage payments, medical expenses, etc. The information on these forms will give you what you need to calculate the taxpayer’s excess monthly income and the quick sale value of the taxpayer’s assets.

Lump Sum Cash Offer. The Offer amount must be paid in five or fewer installments, upon written notice of acceptance. The taxpayer is required to pay 20% of the total amount of the Offer when the Offer is submitted. The amount of the Offer is the realizable value of the taxpayer’s assets plus forty-eight months of payments equal to the taxpayer’s monthly excess income. If the ten-year collection statute of limitations expires in less that forty-eight months, the number of months used to calculate the Offer will often be the months remaining in the collection period.

Example. If a taxpayer has $5,000 of net quick sale value in his or her assets and $100 of excess income per month, his/her Offer amount will be $9,800 if paid in five or fewer installment payments. The required 20% down payment will be $1,960. (Assuming that the statute of limitations on collections is not less than forty-eight months.)

ShortTerm Periodic Payment Offer. The amount of the Offer must be paid within 24 months from the date the IRS received the Offer. The first payment must be submitted along with the Offer and these payments must continue during the Offer investigation. The amount of the Offer is the realizable value of assets plus the total amount the IRS could collect from payments of monthly excess income over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less). The IRS may file a tax lien on tax liabilities compromised under short-term payment Offers.

Example. If a taxpayer has $5,000 of net quick sale value in assets and $100 of excess income per month, his/her Offer would be $11,000 paid over two years. In this case, the taxpayer’s monthly payment would be $458.33 ($11,0000/24). This assumes the statute of limitations on collections is not less than sixty months.)

Deferred Periodic Payment Offer. The amount of the Offer must be paid in regular payments over the remaining statutory period for collecting the tax. The first payment must be submitted along with the Form 656 and these payments must continue during the Offer investigation. The Offer amount must include the realizable value of the taxpayer’s assets plus the amount the IRS could collect through monthly payments of excess income during the remaining life of the collection statute.

Doubt as to Liability Offer (DATL). IRM 5.8.1.3 This type of Offer should be submitted if there is a legitimate doubt whether the taxpayer owes part or all of the assessed tax liability. These Offers are handled more like an audit reconsideration and will involve a review by the exam division. These offers usually involve a mistake by the IRS in the inclusion of an item in income, the disallowance of a deduction or the simply miscalculation of the liability. This is not a second “bite at the apple.” If the IRS has already addressed the issue in Appeals, and the taxpayer still objects to the liability, the taxpayer will most likely have to pursue the matter in court.

Effective Tax Administration Offer (ETA). IRM 5.8.11.2. The Internal Revenue Service also has an “Effective Tax Administration” Offer in Compromise when a taxpayer does not qualify for a DATC or DATL offer. Under this type of Offer in Compromise, the taxpayer owes the taxes and has sufficient assets to pay the full amount of the tax obligation, but due to exceptional circumstances, full payment would cause economic hardship or would be unfair and inequitable. The IRS is looking for reasons based on:

Economic Hardship. For example, the taxpayer is retired and his only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for his basic living expenses. The taxpayer’s overall compliance history does not weigh against compromise. IRM 5.8.11.2.1.7.

Public Policy and Equity.

The taxpayer’s liability was directly caused by a processing error on the part of the Service and would otherwise have been avoided.
The taxpayer incurred the liability because of having followed erroneous advice or instructions from the Service.
If actions or inaction of the Service unreasonably delayed resolution of the taxpayer’s case and interest or penalty abatement is not available, compromise may still be warranted if the circumstances are sufficiently compelling.
The taxpayer can demonstrate that the criminal or fraudulent act of a third party is directly responsible for the tax liability.
Compromise may be appropriate where there is clear and convincing evidence that rejecting the OIC, and pursuing other collection alternatives, would have a significantly negative impact on the community in which the taxpayer lives or does business, i.e. does the taxpayer provide essential services to the community that would be lost if the tax liability was collected in full?
The taxpayer was incapacitated and thus unable to comply with the tax laws.

Not Undermine Compliance. Compromise under the ETA economic hardship or non-economic hardship provisions is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefitted by not complying with the tax laws. For example:

The taxpayer has an overall history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
The taxpayer has taken deliberate actions to avoid the payment of taxes.
The taxpayer has encouraged others to refuse to comply with the tax laws.

Other Issues.

Excess Monthly Income. The other issues identified above in the discussions of installment agreements, section II E 4, are relevant here as the amount of excess monthly income is key to calculating the offer amount.

Extending the Statute of Limitations on Collections. Before a taxpayer submits an Offer, they should carefully calculate the impact it will have on the statute of limitations on collections. The IRS has 10 years from the date of assessment to collect the tax. Submitting an Offer to the IRS automatically extends the statute one year plus the time the Offer is being considered, until it is rejected or withdrawn. If there is only one year left on the statute of limitations for collection and the IRS is not taking any collection action, it may be more appropriate for the taxpayer to simply let the statute of limitations expire, and yes, that does happen.

Appealing a Rejected Offer. If the Offer is rejected, the taxpayer has the right to appeal and continue negotiations on that Offer. The original Representative investigating the Offer may make a mistake in what to include in income, the value of an asset, what to allow for expenses or a simple calculating error. The Appeals Office can and will correct these errors.