The IRS will now consider additional factors in granting equitable relief to innocent spouses, for example, those who claim account abuse by a spouse and lack of control over finances, even if there is no economic hardship to the innocent spouse.
IRS Notice 2012-8 provides additional guidance for innocent spouse defenses and sets out a proposed new Revenue Procedure which the IRS will begin to use immediately when evaluating whether to grant equitable relief requests.
Generally, there are three different kinds of innocent spouse defenses, each with their own distinct rules and exceptions. IRS Notice 2012-8 addresses only the criteria used in making innocent spouse relief determinations under the equitable relief criteria of Internal Revenue Code Section 6015(f).
The Notice clarifies and revises numerous topics. For one, it provides for certain streamlined determinations; it creates new guidance on the potential impact of economic hardship, and the weight to be accorded to certain facts in determining equitable innocent spouse relief. It also clarifies how the IRS takes into account abuse and financial control by the non-requesting spouse in deciding whether to grant equitable relief.
Previously, lack of economic hardship was treated as a factor which weighed against granting equitable innocent spouse relief. Now, if economic hardship exists, it is a factor which weighs in favor of granting innocent spouse relief. Lack of economic hardship will no longer be counted against a requesting spouse. Instead, that factor will be treated neutral, neither weighing against or in favor of granting equitable relief.
IRS Notice 2012-8 provides that abuse or lack of financial control may mitigate other factors that might weigh against granting equitable relief under IRC Section 6015(f). For example, let’s assume that a requesting innocent spouse has knowledge or reason to know of omitted income on a tax return. Additionally, the non-requesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information. As a result of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the non-requesting spouse’s retaliation. In this situation, the abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency.