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

The Taxpayer Advocate. The Taxpayer Advocate Service is an IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled. Each state has at least one local Taxpayer Advocate, who is independent of the local IRS office and reports directly to the National Taxpayer Advocate. The goals of the Taxpayer Advocate Service are to protect individual and business taxpayer rights and to reduce taxpayer burden.

Contacting the Taxpayer Advocate. The Advocate’s toll free telephone number is: 1-877-777-4778 or TTY/TTD: 1-800-829-4059. A list of Taxpayer Advocate Service offices may be found in Publication 1546.

When can the Taxpayer Advocate Help? Generally, the Taxpayer Advocate Service can help if, as a result of the administration of the tax laws, the taxpayer:
Is suffering, or is about to suffer, a significant hardship;
Is facing an immediate threat of adverse action;
Will incur significant cost (including fees for professional representation);
Will suffer irreparable injury or long-term adverse impact;
Has experienced a delay of more than 30 days to resolve the issue; or
Has not received a response or resolution by the date promised.

Submitting a Request for Help. ; Complete and submit Form 911, Application for Taxpayer Assistance Order. Form 911 may be obtained by downloading it from the IRS Website, www.irs.gov or calling the IRS forms-only number, 1-800-829-3676. If Form 911 is not available, send a written request for assistance, or ask an IRS employee to complete a Form 911 on your behalf (in person or over the phone). You may fax a Form 911, Application for Taxpayer Assistance Order (or written request) to your local Taxpayer Advocate.

What information does the Taxpayer Advocate need?
Name, address, and social security number (or employer identification number);
Taxpayer’s telephone number and hours she can be reached;
Taxpayer’s previous attempts to solve the problem, and the office she contacted;
The type of tax return and year(s) involved; and,
Description of the problem or hardship (if applicable).

What Does the Taxpayer Advocate do with the Application? An Application for a Taxpayer Assistance Order requires the Advocate to determine if significant hardship exists and to review the case to determine what action should be taken to relieve the hardship. Enforcement action may be suspended while the case is being reviewed.

The Taxpayer Advocate Service is not a substitute for established IRS procedures or the formal Appeals process. The Taxpayer Advocate Service cannot reverse legal or technical tax determinations.

IRS Advocate Service
IRS Advocate Service At-a-Glance
MDR Tax Advocate

A Notice of Federal Tax Lien (NFTL) can cause irreversible harm to an individual or a business. The NFTL is usually filed with the County recorder and/or the Secretary of State at exactly the wrong time, that being when the individual or business has the greatest need for good credit. The NFTL will damage a good credit rating and possibly prevent creditors and vendors from continuing or starting to do business with the individual or business. Sometimes, the taxpayer’s real concern does not involve their credit, but rather, the damage to their good reputation.

We are often asked how to stop the IRS from filing a NFTL. Other than paying the obligation in full or filing a petition in bankruptcy, stopping the filing of the lien is dependent on convincing the IRS that not filing the lien is in its best interests. We understand from recent conversations with IRS representatives that while it has been difficult in the past, stopping the lien filing is about to become even more difficult.

The IRS’s primary goals in filing a NFTL are to:

1. Prevent the taxpayer from selling property and using the proceeds to pay other creditors ahead of the IRS. 
2. Protect the IRS’s position ahead of other creditors who may also be pursuing or intend to pursue the taxpayer and could obtain a security interest, a mechanic’s lien, or judgment.

The IRS is required to try to contact the taxpayer prior to filing the federal tax lien. Internal Revenue Manual (I.R.M.) 5.12.2.3. Usually, this contact is in the form of a field visit, telephone call, or mailed notice. I.R.M. 5.12.2.1. The IRS will usually proceed with filing the federal tax lien approximately 10 days after making contact with the taxpayer. I.R.M. 5.12.2.4. So, the keys to preventing the filing are to make a timely demonstration to the IRS that it does not need to worry about these issues and that it will be in a better position if it does not file the lien. This is difficult, but it can be done in the right circumstances.

One option is to request a hearing with an Appeals Officer under the Collection Appeals Program (CAP), prior to the filing of the lien. Filing a CAP hearing allows the taxpayer to raise any grievances and ensure IRS rules and regulations are followed. Unfortunately, the CAP procedures do not give the Appeals Officer much authority beyond reviewing the administrative handling of the taxpayer’s case. Processing these hearings can take between 14 and 60 days, depending on the backlog. There are no appeal rights that accompany these hearings, so the hearing officer’s decision is final.

You may also receive a notice of a right to Collection Due Process (CDP) hearing prior to the filing of the lien. Again, this allows you to ask an Appeals Officer to consider delaying or preventing the lien by showing him or her that it is the best interests of the IRS to not file the lien. The advantage of a CDP hearing is that the Appeals Officer has much more authority and can consider delaying the lien if it is in the best interests of the IRS. You may negotiate a collateral agreement, post a bond to guarantee the IRS’s interest, or prove that filing a federal tax lien will hamper the IRS’s ability to collect the obligation.

If the NFTL has already been filed, you may still have an option. You may submit an Application for Withdrawal of a Federal Tax Lien. The IRS will withdraw the federal tax lien if it was filed prematurely or incorrectly. The withdrawal has the advantage of removing the lien as if it had never been filed.

Having an outstanding obligation with the Internal Revenue Service (IRS) and being unable to propose an acceptable resolution to satisfy that obligation is an intimidating scenario for any taxpayer. The IRS will entertain a variety of solutions to resolve an obligation, including Offers in Compromise and Installment Agreements, but, sometimes, the taxpayer simply cannot afford these options. What happens then?

The taxpayer should continue communicating with the IRS. Under the right circumstances, the IRS will determine that a taxpayer’s account is “currently not collectible.” This determination allows the IRS to “shelve” the taxpayer’s account for a limited period of time, often two years. While the IRS will most likely file or have already filed a lien before “shelving” the account, during the “not collectible” period, the IRS will not take any collection action, like levying bank accounts or wages. Unfortunately, this determination does not stop the addition of interest and penalties.

This relief from IRS enforcement gives the taxpayer time to reorganize his or her financial matters, reduce expenses, and increase income, to better position themselves for an Offer in Compromise or an Installment Agreement when the case is sent back to the field. Unfortunately, even this additional time may not be enough to make a difference. In those cases, when the IRS checks back with the taxpayer after two years, it may again determine that the account is currently not collectible. These follow-up determinations will continue until the expiration of the statute of limitations on collection, that being 10 years from the date the taxes were originally assessed, subject to extension. When the statute of limitations expires, the taxpayer will be relieved from all collection activity.

Another benefit of an account being classified as currently not collectible is that it may provide sufficient time for taxes to become dischargable in bankruptcy. For more information about discharging taxes in bankruptcy, see our earlier article on the topic.

There are a variety of situations that will encourage the IRS to classify a taxpayer’s account as currently not collectible. One of these situations is when IRS enforcement action would cause an undue hardship the taxpayer’s household. To prove an undue hardship, the taxpayer must demonstrate to the IRS that a monthly payment to the IRS will make him or her unable to meet reasonable and necessary living expenses. The IRS will determine whether a hardship exists by conducting a financial analysis of his or her situation. Even though the taxpayer may believe he or she does not have any excess income, the IRS’s financial analysis may show otherwise.

No matter what grounds the IRS uses to determine that a taxpayer’s account is currently not collectible, this determination can be helpful. Even though it is a temporary remedy, it can facilitate a long-term resolution. With this determination, the taxpayer will have the time he or she needs to find an appropriate solution to their outstanding obligations.