Embed Size (px)
Citation preview
7/14/2016
1
Innocent Spouse
Kristy Maitre – Tax SpecialistCenter for Agricultural Law and TaxationJuly 14, 2016
Introduction
• Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows
• Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce
• This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns
• One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse
• In some cases, a spouse will be relieved of the tax, interest, and penalties on a joint tax return
What’s New?
• The Internal Revenue Service issued Revenue Procedure 2013‐34
• This revenue procedure expands how the IRS will take into account abuse and financial control by the non‐requesting spouse in determining whether equitable relief is warranted
• It also broadens the availability of refunds in cases involving deficiencies
7/14/2016
2
Rev. Proc. 2013‐34 Factors
• Marital Status
• Economic Hardship
• Knowledge
• Abuse
• Legal Obligation
• Significant benefit
• Compliance with Income Tax Laws
• Mental or Physical Health
Determinations
• In the taxpayers favor
• Neutral
• Not in the taxpayers favor
Form 8857
7/14/2016
3
Should the Taxpayer File Form 8857?
Three Types of Relief is Available
• Innocent spouse relief• Separation of liability• Equitable relief• The taxpayer is not required to figure the tax, interest,
and penalties that qualify for relief– The IRS will figure these amounts after the taxpayer files Form 8857, Request for Innocent Spouse Relief
• Married persons who file separate returns in community property states may also qualify for relief
• https://www.irs.gov/businesses/small‐businesses‐self‐employed/three‐types‐of‐relief‐at‐a‐glance
Three Types of Relief
7/14/2016
4
Three Types of Relief
Three Types of Relief
Three Types of Relief
7/14/2016
5
How Does a Taxpayer Request Relief?
• File Form 8857, Request for Innocent Spouse Relief
• Multiple forms are not required
• One form can cover multiple years
• The taxpayer can include a letter and any other information they would like IRS to consider when they file
When Should Form 8857 be Filed?
• The taxpayer should file Form 8857 as soon as you become aware of a tax liability for which they believe only the spouse or former spouse should be held responsible
• The following are some of the ways you may become aware of such a liability– The IRS is examines the tax return and proposes an increase in the tax liability
– The IRS sends a notice
Timing of the Filing
• The taxpayer generally must file Form 8857 no later than 2 years after the first IRS attempt to collect the tax after July 22, 1998
• There are exceptions
• Do not delay filing because the taxpayer does not have the required documentation
7/14/2016
6
Exception for Equitable Relief
• On July 25, 2011, the IRS issued Notice 2011‐70 expanding the amount of time to request equitable relief
• The amount of time to request equitable relief depends on whether you are seeking relief from
– A balance due
– Seeking a credit or refund, or
– Both
Balance Due
• Generally, you must file your request within the time period the IRS has to collect the tax
• Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax
• In certain cases, the 10‐year period is suspended– Offer in Compromise– Bankruptcy– Judgment litigation– Suit to reduce assessment judgment– Collection due process hearing– Relief From Joint And Several Liability On Joint Returns/Innocent Spouse– Taxpayer Living Outside the U.S.– Policies For Adjusting the CSED When Internal Revenue Code (IRC) 6503(c) Applies – Suspension for Partnerships with Addresses Outside the U.S. – Combat Zone or Contingency Operation– Military Deferment – Wrongful Levy (Seizure) – Estate Tax Lien – Taxpayer Assistance Order (TAO) – Substitute for Return
Credit or Refund
• Generally, the taxpayer must file the request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later
• But they may have more time to file if they live in a federally declared disaster area or they are physically or mentally unable to manage their financial affairs
7/14/2016
7
Both a Balance Due and a Credit or Refund
• If the taxpayer is seeking a refund of amounts paid and relief from a balance due over and above what they have paid, the time period for credit or refund will apply to any payments they have made, and the time period for collection of a balance due amount will apply to any unpaid liability
Exception for Relief Based on Community Property Laws
• If the taxpayer is requesting relief based on community property laws, they must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against the spouse or former spouse for the tax year for which they are requesting relief
• If the IRS begins an examination of the return during the 6‐month period the latest time for requesting relief is 30 days after the date of the IRS’ initial contact letter
• The period of limitations on assessment is the amount of time, generally 3 years, that the IRS has from the date the taxpayer filed the return to assess taxes that are owed
• If the taxpayer does not qualify for the relief described above and are now liable for an unpaid or understated tax they believe should be paid only by the spouse or former spouse, they may request equitable relief
§6015Relief from Joint and Several Liability on Joint Return
• In general Notwithstanding § 6013(d)(3)—
– An individual who has made a joint return may elect to seek relief
– Such individual may, if eligible elect to limit such individual’s liability for any deficiency with respect to such joint return
– Any determination under this section shall be made without regard to community property laws
7/14/2016
8
Innocent Spouse Relief §6015(b)
• Procedures for relief from liability applicable to all joint filers– A joint return has been made for a taxable year that has an
understatement of tax attributable to erroneous items of one of the spouses
– The other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement
– Taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and
– The other individual elects the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election
• Then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement
Erroneous Items
• Unreported income– This is any gross income item received by the spouse (or former spouse)
that is not reported
• Incorrect deduction, credit, or basis– This is any improper deduction, credit, or property basis claimed by the
spouse (or former spouse)
• The following are examples of erroneous items– The expense for which the deduction is taken was never paid or incurred
• For example, the spouse, a cash‐basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of the joint Form 1040, but never paid for any advertising
– The expense does not qualify as a deductible expense• For example, the spouse claimed a business fee deduction of $10,000 that was for
the payment of state fines
– Fines are not deductible• No factual argument can be made to support the deductibility of the expense
– The spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs
Actual Knowledge or Reason To Know
• The taxpayer knew or had reason to know of an understatement if:
• They actually knew of the understatement, or
• A reasonable person in similar circumstances would have known of the understatement
7/14/2016
9
Partial Relief When Portion of Erroneous Item is Unknown
• The taxpayer may qualify for partial relief if, at the time they filed the return, they had no knowledge or reason to know of only a portion of an erroneous item
• They will be relieved of the understatement due to that portion of the item if all other requirements are met for that portion
• Example– If at the time the taxpayer signed the joint return, they knew that the
spouse did not report $5,000 of gambling winnings– The IRS examined the tax return several months after they filed it and
determined that the spouse's unreported gambling winnings were actually $25,000
– The taxpayer established that they did not know about, and had no reason to know about, the additional $20,000 because of the way the spouse handled gambling winnings
– The understatement of tax due to the $20,000 will qualify for innocent spouse relief if they meet the other requirements
– The understatement of tax due to the $5,000 of gambling winnings will not qualify for relief
Indications of Unfairness for Innocent Spouse Relief
• The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold the taxpayer responsible for the understatement
• The following are examples of factors the IRS will consider– Whether the taxpayer received a significant benefit, either directly or indirectly, from the understatement
– Whether the spouse (or former spouse) deserted the taxpayer
– Whether the taxpayer and your spouse had been divorced or separated
– Whether the taxpayer received a benefit on the return from the understatement
Significant Benefit
• A significant benefit is any benefit in excess of normal support• Normal support depends on the particular circumstances• Evidence of a direct or indirect benefit may consist of transfers of
property or rights to property, including transfers that may be received several years after the year of the understatement
• Example– The taxpayer receives money from the spouse that is beyond normal
support– The money can be traced to the spouse's lottery winnings that were not
reported on a joint return– The taxpayer will be considered to have received a significant benefit
from that income– This is true even if your spouse gives you the money several years after
he or she received it
7/14/2016
10
Allocation of Liability §6015(c)
• If an individual who has made a joint return for any taxable year elects the application of this subsection, the individual’s liability for any deficiency shall not exceed the portion of such deficiency properly allocable to the individual
• Burden of proof
– Each individual who elects the application shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual
What are the Rules for Separation of Liability?
• Under this type of relief, the taxpayer divides (separate) the understatement of tax (plus interest and penalties) on the joint return between the taxpayer and the spouse
• The understatement of tax allocated to the taxpayer is generally the amount of income and deductions attributable to their earnings and assets
• To qualify for separate liability, the taxpayer must have filed a joint return and meet either of the following requirements at the time they file Form 8857:– They are no longer married to, or are legally separated from, the
spouse with whom they filed the joint return for which they are requesting relief. (Under this rule, they are no longer married if they are widowed.)
– The taxpayer was not a member of the same household as the spouse with whom they filed the joint return at any time during the 12 month period ending on the date they file Form 8857
Members of the Same Household
• The taxpayer and spouse are not members of the same household if you are living apart and are estranged
• However, the taxpayer and spouse are considered members of the same household if any of the following conditions are met:– The taxpayer and spouse reside in the same dwelling– The taxpayer and spouse reside in separate dwellings but are not
estranged, and one of them is temporarily absent from the other's household
– Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household
– The household or a substantially equivalent household is maintained in anticipation of the absent spouse's return
– Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education.
7/14/2016
11
Burden of Proof
• The taxpayer must be able to prove that they meet all of the requirements for separation of liability (except actual knowledge) and that they did not transfer property to avoid tax
• They must also establish the basis for allocating the erroneous items
Actual Knowledge
• The taxpayer has actual knowledge of an erroneous item if:
• They knew that an item of unreported income was received
• They knew of the facts that made an incorrect deduction or credit unallowable
• For a false or inflated deduction, they knew that the expense was not incurred, or not incurred to the extent shown on the tax return
Factors Supporting Actual Knowledge
• Whether the taxpayer made a deliberate effort to avoid learning about the item in order to be shielded from liability
• Whether the taxpayer and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item
7/14/2016
12
Domestic Abuse Exception
• Even if the taxpayer had actual knowledge, they may still qualify for relief if they establish that:– They were the victim of domestic abuse before signing the return, and
– Because of that abuse, they did not challenge the treatment of any items on the return because they were afraid the spouse (or former spouse) would retaliate against them
• If the taxpayer establishes that they signed the joint return under duress, then it is not a joint return, and they are not liable for any tax shown on that return or any tax deficiency for that return– However, the taxpayer may be required to file a separate return for that tax year
Transfers of Property to Avoid Tax
• If the spouse transfers property (or the right to property) to the taxpayer for the main purpose of avoiding tax or payment of tax, the tax liability allocated to the taxpayer will be increased by the fair market value of the property on the date of the transfer
• The increase may not be more than the entire amount of the liability
Transfers of Property to Avoid Tax
• A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is one year before the date on which the IRS sent its first letter of proposed deficiency
• This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement
• The presumption will also not apply if the taxpayer establishes that the transfer did not have as its main purpose the avoidance of tax or payment of tax
7/14/2016
13
Transfers of Property to Avoid Tax
• If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to the taxpayer will be increased
Why Would a Request for Separate Liability be Denied?
• Even if the taxpayer meets the requirements, a request for separate liability will not be granted in the following situations:– The IRS proves that the taxpayer and the spouse transferred assets for the main purpose of avoiding payment of tax
– The IRS proves that at the time the taxpayer signed the joint return, they had actual knowledge that any items giving rise to the deficiency and allocable to the spouse were incorrect
If a Husband and Wife are still Married but Separated for 12 Months, Prior to
Filing a Claim for Relief due to an Involuntary Reason such as Incarceration or Military Duty, can Separation of Liability Relief be Granted?
• Separation of liability applies to taxpayers who are :• No longer married• Legally separated• Living apart for the 12 months prior to the filing of a claim• Under this rule, the taxpayer is no longer married if they are
widowed– Living apart does not include a spouse who is temporarily absent from
the household– A temporary absence exists if it is reasonable to assume that the
absent spouse will return to the household, or– A substantially equivalent household is maintained in anticipation of
such a return– A temporary absence may include absence due to incarceration,
illness, business, vacation, military service, or education
• A claim can be filed if any of the three statutory requirements are met
7/14/2016
14
What are the Rules for Equitable Relief?
• Equitable relief is only available if the taxpayer meets all of the following conditions:– The taxpayer does not qualify for innocent spouse relief or the separation of liability
election– The requesting spouse filed a joint return for the taxpayer year for which he or she
seeks relief– The claim must be filed timely– No assets were transferred between spouses as part of a fraudulent scheme– The no requesting spouse did not transfer “disqualified assets” to the requesting
spouse– The ex‐spouse did not knowingly participate in the filing of a fraudulent joint return– The IRS determines that it is unfair to hold the taxpayer liable for the
understatement of tax taking into account all the facts and circumstances– The income tax liability from which the requesting spouse seeks relief is
attributable (either in full or in part) to an item of the non‐requesting spouse or an underpayment resulting from the non‐requesting spouse’s income
• Note: Unlike innocent spouse relief or separation of liability, if the taxpayer qualifies for equitable relief, they can get relief from an understatement of tax or an underpayment of tax
Equitable Relief §6015(f)
• Taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either) and
• Relief is not available to such individual, as provided in other subsections, the Secretary may relieve such individual of such liability
Equitable Relief
• The taxpayer may be allowed equitable relief if both of the following conditions are met:
– They have an understated tax or unpaid tax, and
• Equitable relief is the only type of relief available for an unpaid tax
7/14/2016
15
What Factors are Considered in Determining Whether or not to Grant Equitable Relief?
• The following factors may be considered, but the list is not all‐inclusive:– Current marital status– Reasonable belief of the requesting spouse, at the time he or she signed the
return, that the tax was going to be paid; or in the case of an understatement, whether the requesting spouse had knowledge or reason to know of the understatement
– Current financial hardship/inability to pay basic living expenses– Spouses' legal obligation to pay the tax liability pursuant to a divorce decree or
agreement to pay the liability– To whom the liability is attributable– Significant benefit received by the requesting spouse– Mental or physical health of the requesting spouse on the date the requesting
spouse signed the return or at the time the requesting spouse requested the relief
– Compliance with income tax laws following the taxable year or years to which the request for relief relates
– Abuse experienced during the marriage
Unpaid Tax
• An unpaid tax is tax that is properly shown on the return but has not been paid
Understated Tax
• The taxpayer has an understated tax if the IRS determined that the total tax should be more than the amount actually shown on the return
7/14/2016
16
§6015(d)Allocation of Deficiency
• The portion of any deficiency on a joint return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual
Certain Items are Treated Separately
• The disallowance of a credit
• Any tax required to be included with the joint return
• Items allocated to one individual as required by the code
Child’s Liability
• If the liability of a child of a taxpayer is included on a joint return, such liability shall be disregarded in computing the separate liability of either spouse and such liability shall be allocated appropriately between the spouses
7/14/2016
17
Allocation of Items Giving Rise to the Deficiency
• Any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year– Exception where other spouse benefits
• An item otherwise allocable to an individual shall be allocated to the other individual filing the joint return to the extent the item gave rise to a tax benefit on the joint return to the other individual
– Exception for fraud• The Secretary may provide for an allocation of any item if the Secretary establishes that such allocation is appropriate due to fraud of one or both individuals
– Limitations on separate returns disregarded• If an item of deduction or credit is disallowed in its entirety solely because a separate return is filed, such disallowance shall be disregarded and the item shall be computed as if a joint return had been filed and then allocated between the spouses appropriately
Example
• You and your former spouse filed a joint return showing $5,000 of tax, which was fully paid
• The IRS later examines the return and finds $10,000 of income that the former spouse earned but did not report
• With the additional income, the total tax becomes $6,500
• The understated tax is $1,500, for which you and the former spouse are both liable
Erroneous Items
• Any income, deduction, credit, or basis is an erroneous item if it is omitted from or incorrectly reported on the joint return
• Partial innocent spouse relief
– If the taxpayer knew about any of the erroneous items, but not the full extent of the item(s), the taxpayer may be allowed relief for the part of the understatement they did not know about
7/14/2016
18
Separation of Liability Relief
• The taxpayer may be allowed separation of liability relief for any understated tax shown on the joint return(s) if the person with whom they filed the joint return is deceased or the taxpayer and that person:
– Are now divorced
– Are now legally separated, or
– Have lived apart at all times during the 12‐month period prior to the date the Form 8857 is filed
The IRS Must Contact Your Spouse or Former Spouse
• By law, the IRS must contact the spouse or former spouse
• There are no exceptions, even for victims of spousal abuse or domestic violence
• The IRS will inform the spouse or former spouse that a Form 8857 has been filed and will allow him or her to participate in the process
• If the taxpayer is requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding the requested relief
Privacy
• To protect the taxpayer’s privacy, the IRS will not disclose personal information such as:– The current name– Address– Phone number(s)– Information about the current employer– Income– Assets– Any other information the taxpayer provides that the IRS uses to make
a determination about the request for relief from liability could be disclosed to the person listed on line 5
• If the taxpayer has other concerns about privacy or the privacy of others, they should redact or black out personal information in the material submitted
7/14/2016
19
Line 5
• Enter the current name and SSN (if known) of the person to whom the taxpayer was married at the end of the year(s) listed on line 3
• P.O. box. Enter the box number only if:
– The taxpayer does not know the street address, or
– The post office does not deliver mail to the street address
Domestic Abuse
Line 8 – Victim of Abuse
• If you wish to have the note removed from the account, call IRS at 1‐855‐851‐2009 or write at either of the addresses or the fax number
• Please include the social security number on the written request
7/14/2016
20
Part V
Part V
Part III Signing the Return
7/14/2016
21
Part III Signing the Return
• By law, if a person's name is signed to a return, it is presumed to be signed by that person, unless that person proves otherwise
• If the taxpayer believes the signature was forged or they signed under duress, an explanation is needed
• If the taxpayer signed a joint return under duress or the signature was forged, the election to file jointly is not valid and the taxpayer has no valid return
• The taxpayer would not be jointly and severally liable for any income tax liabilities arising from that return
• In that case, innocent spouse relief does not apply and is not necessary for obtaining relief
Part III Signing the Return
• If the taxpayer files Form 8857, but also maintain that there is no valid joint return due to duress or forgery, the IRS will first make a determination as to the validity of the joint return and may accordingly deny the request for innocent spouse relief based on the fact that no joint return was filed
• If it is ultimately determined that a valid joint return was filed, the IRS will then consider whether the taxpayer would be entitled to innocent spouse relief on the merits
Forged Signature
• The signature on the joint return is considered to be forged if it was not signed by the taxpayer and they did not authorize (give tacit consent) the signing of the name to the return
7/14/2016
22
Tacit Consent
• Tacit consent means that, based on the taxpayer’s actions at the time the joint return was filed, they agreed to the filing of the joint return even if they now claim the signature on the return is not theirs
• Whether the taxpayer has tacitly consented to the filing of the joint return is based on an examination of all the facts of the case
• Factors that may support a finding that the taxpayer consented to the filing of the joint return include the following.– They gave tax information (such as Forms W‐2 and 1099) to the spouse– They did not object to the filing– There was an apparent advantage to the taxpayer in filing a joint return– The taxpayer filed joint returns with your spouse or former spouse in
prior years– The taxpayer failed to file a married filing separate return and they had
a filing requirement
Signed Under Duress
• The taxpayer is considered to have signed under duress (threat of harm or other form of coercion) if they were unable to resist demands to sign the return and they would not have signed the return except for the constraint applied by the spouse or former spouse
• The duress must be directly connected with the signing of the joint return
Transfer of Assets or Money
• The taxpayer may not be entitled to relief if either of the following applies.– The spouse (or former spouse) transferred property (or the right
to property) to the filer of Form 8857 for the main purpose of avoiding tax or payment of tax
– A transfer will be presumed to meet this condition if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency
– The IRS proves that the taxpayer and the spouse (or former spouse) transferred property to one another as part of a fraudulent scheme
– A fraudulent scheme includes a scheme to defraud the IRS or another third party such as a creditor, former spouse, or business partner
7/14/2016
23
Fair Market Value
• Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller when both have reasonable knowledge of the relevant facts and neither has to buy or sell
• FMV is not necessarily the cost of replacing the item
1‐855‐851‐2009
• Is there a toll free number to call if I have questions regarding an Innocent Spouse Claim or how to complete the Form 8857 Request for Innocent Spouse Relief?
Documents to Submit with the Claim
• The taxpayer should carefully review the Form 8857, Request for Innocent Spouse Relief, and it will guide them on what documents to submit
7/14/2016
24
How Long will the Process Take?
• When a Form 8857, Request for Innocent Spouse Relief, is filed with the IRS, it may take up to 6 months before a determination is made
• During the processing time, the Service is requesting tax information and contacting the non‐requesting spouse
Should the Taxpayer Wait to File the Current year Tax Return Pending the Outcome of the Claim?
• No
• The taxpayer should file the current return and IRS will not hold any refund due
The Innocent Spouse Claim was Previously Denied and the Taxpayer has New Additional Information, Can they
File the Claim Again?
• Yes
• They can file a second claim, provide the new additional information and it will be reconsidered
• However, the taxpayer will not have tax court rights on the reconsideration
7/14/2016
25
Does the Non‐Requesting Spouse Have any Appeal Rights?
• Per Rev. Proc. 2003‐19, the non‐requesting spouse has the right to appeal the preliminary determination to grant partial or full relief to the requesting spouse when the preliminary determination letter is issued April 1, 2003 or later
• However, the non‐requesting spouse may not petition the Tax Court from the final determination letter
• If relief is denied in part or in full, and the requesting spouse petitions the U.S. Tax Court, the non‐requesting spouse, by law, will be given the opportunity to become a party in that proceeding
• For claims where a preliminary determination was issued prior to April 1, 2003, the non‐requesting spouse had no appeal rights when the preliminary determination letter granted relief in part or in full to the requesting spouse
• If relief was denied and the requesting spouse petitioned the U.S. Tax Court, the non‐requesting spouse, by law, was given the opportunity to be a party in that proceeding
Will the Taxpayer Qualify for Innocent Spouse Relief in any Situation Where there is an Understatement
of Tax?• Not always
– There are many situations in which the taxpayer may owe tax that is related to the spouse, but not be eligible for innocent spouse relief
– For example, the taxpayer and spouse file a joint return that reports $10,000 of income and deductions, but the taxpayer knew or had reason to know that the spouse was not reporting $5,000 of dividends
– The taxpayer would not be eligible for innocent spouse relief when they have knowledge or reason to know of the understatement
How do State Community Property Laws Affect a taxpayer’s Ability to Qualify for Relief?
• Community property states are– Arizona– California– Idaho– Louisiana– Nevada– New Mexico– Texas– Washington, and – Wisconsin
• Generally, community property laws require a taxpayer to allocate community income and expenses equally between both spouses
• However, community property laws are not taken into account in determining whether an item belongs to the taxpayer or their spouse (or former spouse) for purposes of requesting any relief from liability
7/14/2016
26
If the Taxpayer is Denied Innocent Spouse Relief, Do They Have to
Re‐Apply to Qualify Under One of the other Two Provisions?
• No– The IRS will automatically consider whether any of the other provisions would apply
– If you requested innocent spouse relief or separation of liability, IRS will automatically consider equitable relief
• The only time a taxpayer can reapply for relief is if they were denied relief because IRS considered them still married at the time the request for relief was filed and they can now satisfy the marital status requirements to elect to separate the liability
Will the IRS Deny Relief if the Taxpayer Does Not Provide the information IRS Requests?
• IRS will base the decision upon all the information available to them
• If enough information is not available, it could adversely affect a request for relief
The Taxpayer Filed an Offer in Compromise that IRS Accepted, Can the Taxpayer Still Apply for Innocent
Spouse Relief?
• No
• IRS cannot consider the claim for any year in which an Offer in Compromise was accepted
• Acceptance of an Offer in Compromise conclusively closes the tax year(s) compromised from any re‐determination of the tax liability
7/14/2016
27
The Taxpayer Signed a Closing Agreement, Can They Still Apply for Innocent Spouse Relief?
• It depends on the type of closing agreement signed
• If the taxpayer signed Form 866, Agreement as to Final Determination of the Tax Liability, the tax year is closed with finality and you cannot apply for innocent spouse relief
• If the taxpayer signed Form 906, Closing Agreement on Final Determination Covering Specific Matters, only those matters covered in the closing agreement are conclusively closed
• Innocent spouse relief may be requested for matters not covered in the closing agreement
The Taxpayer is Currently Under Examination, How Do They Request Innocent Spouse Relief?
• Prepare Form 8857, Request for Innocent Spouse Relief, and mail it to:– Internal Revenue Service– P.O. Box 120053– Covington, KY 41012
• OR• If using a private delivery service, please mail the
Form 8857, Request for Innocent Spouse Relief, to:– Internal Revenue Service– 201 W. Rivercenter Blvd.– Stop 840F– Covington, KY 41011
What if the IRS has Levied the Taxpayer’s Account for the Tax Liability and They Decide to Request Relief?
• Upon receipt of the request for relief all collection activity against the taxpayer will be suspended unless the liability is in jeopardy or the statute of limitation on collection will expire shortly
7/14/2016
28
What Constitutes a Collection Activity for Purposes of Starting the Two‐Year Statute of Limitations that Cover the Filing of Form 8857?
• When the IRS • (1) sends a notice under § 6330 of the Service’s
intent to levy and of the taxpayer’s right to a collection due process (CDP) hearing
• (2) offsets a refund from another tax year and you received a notice advising you of your rights under § 6015 or
• (3) files a judicial suit or claim that puts the requesting spouse on notice the IRS intends to collect the joint tax liability from specific property belonging to that spouse
The Taxpayer Filed a Valid Joint Return with the Spouse and Has an Installment Agreement to Pay the TaxesCan the Taxpayer still Apply for Relief?
• The innocent spouse rules may apply in your situation
• However, regarding the installment agreement, there are some important considerations:– If you do not continue to make payments while the IRS considers the request for relief, the installment agreement will default and full payment will be due immediately if the request for relief is denied
What is the Meaning of “Economic Hardship” for Purposes of Equitable Relief of an Underpayment of Tax Liability Shown on
a Tax Return?
• "Economic hardship" means that you are unable to pay your basic living expenses, e.g. food, clothing, housing, utilities, medical expenses (including health insurance), transportation, child care, child support, etc
7/14/2016
29
Will the Taxpayer Receive a Refund of all Amounts Paid if Relief is Granted?
• It depends upon the provision under which relief is granted• If innocent spouse relief is granted under § 6015(b), refunds
are allowable for amounts paid on or after July 22, 1998• If separation of liability is granted under § 6015(c), no
refunds are allowable• If equitable relief is granted under § 6015(f), refunds are
allowed for payments made after 7‐22‐98 unless the payments were made jointly with the non‐requesting spouse, payments were made with the return or payments were made by the non‐requesting spouse– Note: All refunds are subject to Internal Revenue Code section
6511– This code section only allows refunds for payments made within
2 years after the tax was paid or 3 years after the return was filed whichever is later
Will the Taxpayer be Granted Innocent Spouse Relief with Respect to Unreported Income if They feel it Was the Accountant’s Fault that the
Income was not Reported on the Return?
• Innocent spouse relief is in no way meant to transfer the liability to an accountant
• If the income was the taxpayer’s (rather than the spouse's), or was the spouse's but the taxpayer knew about it, they will probably not be relieved of liability
Understatement
• If an understatement is the result of signing an examination report that lists omissions of income, does this indicate there was knowledge of items giving rise to the deficiency?
• No
– The innocent spouse provisions clearly state the knowledge has to do with what was known at the time the return was signed
7/14/2016
30
Where Should the Innocent Spouse Claim be Filed?
• If using the U.S. Postal Service, please mail the Form 8857, Request for Innocent Spouse Relief, to:– Internal Revenue Service– P.O. Box 120053– Covington, KY 41012
• OR• If using a private delivery service, please mail the Form 8857, Request for
Innocent Spouse Relief, to:– Internal Revenue Service– 201 W. Rivercenter Blvd.– Stop 840F– Covington, KY 41011
• OR– You may fax the Form 8857 and attachments to the IRS at 855‐233‐8558.– Please write your name and social security number on any attachments
• Note: Please do not file the Form 8857 with your tax return or Tax Court
CALT Website
http://www.calt.iastate.edu/
Tour of the CALT Website
7/14/2016
31
Changes to the Iowa Farm and Urban Tax Schools
• It has been a season of change – this is good
• Our Fall and Winter Tax Schools are changing – this is good
• September 9, 2016 – Farm Tax Seminar
• All Farm issues All day
• For the winter tax schools, farm issues may come up but we will center on other issues important to your practice, including ethics for early bird attendees at some sessions
Please WelcomePhil Harris
• Professor, Agricultural and Applied Economics –University of Wisconsin‐Madison– J.D., University of Chicago, 1977– M.A., Economics, University of Chicago, 1975– B.S., Economics, Iowa State University, 1973
• His research program focuses on business and tax planning for agricultural producers
• The program includes information on the choice of entity for organizing a farm business and for transferring a farm business to the next generation
• Income, estate and gift tax consequences as well as non‐tax issues
Phil Harris
Phil Harris CALT Speaker
• September 9, 2016 Farm Tax Seminar
• The session will also be available via webinar
• Instructor – Farm and Urban Tax School
• November 21 – 22 –Waterloo
• December 12 – 13 ‐ Ames
7/14/2016
32
Fall Tax Schools
• Though they are named the Farm and Urban Tax Schools the schools cover more than farm issues
• Common return issues for all kinds of returns are covered• All kinds of business entities• Problematic issues• Sometimes we even get into to issues that you many
encounter only once or twice a year or tax season• The Tax Schools are a blend of diverse topics of interest to
all tax professionals• This year: New instructors with diverse backgrounds• Your adventure awaits at Iowa State’s Center for
Agricultural Law and Taxation
Farm and Urban Tax Schools 2016
• November 2, 2016 to December 13, 2016 • 8 Locations in Iowa and Online Webinar• Save the Date for the 2016 Annual Farm and Urban Income Tax
Schools• The program is intended for tax professionals and is designed to
provide up‐to‐date training on current tax law and regulations– November 2‐3: Maquoketa– November 7‐8: Red Oak– November 9‐10: Sheldon– November 14‐15: Mason City– November 17‐18: Ottumwa– November 21‐22: Waterloo– December 5‐6: Denison– December 12‐13: Ames and Live Webinar
September Farm Tax SchoolNavigating Changing Times
• September 8, 2016 to September 9, 2016, Ames, Iowa and Online• Attend any one day or both days, either in‐person or online! Company
discount for 3 or more individuals from the same employer!• Ag Law Seminar, September 8• Our Thursday seminar will offer practical, interesting information you can
immediately apply in your practice or ag‐related business. You’ll leave with forms and other tools to help you more efficiently serve your ag clients.
• Farm Tax Workshop, September 9• Our Friday seminar will be a comprehensive one‐day farm tax workshop
designed to equip tax practitioners with the tools they need to prepare farm income tax returns, from the simple to the complex.
• Online Registration: https://goo.gl/pdJTK5
7/14/2016
33
Registration Fees
• Early Rate ‐ Registered on/by August 31– Attend in person or watch from your computer– Any one day: $200– Both days: $350– Company Discount: $10 discount per individual if 3 or more are
registered from the same employer ‐ this is available for either on‐site or online attendance
• Late Rate ‐ Registered after August 31– Attend in person or watch from your computer– Any one day: $220– Both days: $370– Company Discount: $10 discount per individual if 3 or more are
registered from the same employer ‐ this is available for either on‐site or online attendance
Continuing Education
• Ag Law Seminar (September 8)– Continuing Legal Education (CLEs) ‐ 7 hours (including one hour of ethics)
– Others Professional Education (CPEs) ‐ 7‐8 hours (including one hour of ethics)
• Farm Tax Workshop (September 9)– Continuing Legal Education (CLEs) ‐ 7 hours (including one hour of ethics)
– Others Professional Education (CPEs) ‐ 7‐8 hours (including one hour of ethics)
Speakers
• Ag Law Seminar– Shannon Ferrell, Associate Professor, Agricultural Economics, Oklahoma State
University– Eldon McAfee, Shareholder, Brick Gentry P.C.– Erin Herbold‐Swalwell, Shareholder, Brick Gentry P.C.– Julia Vyskocil, Shareholder, Brick Gentry P.C.– Pat Dillon, Dillon Law P.C.– Professor Neil Hamilton, Director of Drake Law School Agricultural Law Center– John Baker, Iowa State’s Beginning Farmer Center Administrator– Jennifer Zwagerman, Associate Director of Drake Law School Agricultural Law
Center– Kristine Tidgren, Assistant Director for the Center for Agricultural Law &
Taxation
• Farm Tax Workshop– Philip E. Harris, JD, University of Wisconsin professor– Kristy Maitre, Tax Specialist with the Center for Agricultural Law & Taxation
7/14/2016
34
Farm Tax Seminar Topics• Legislative Update: The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) and the Consolidated
Appropriations Act, 2016 (CAA of 2016)
• Income Issues
• Constructive Receipt
• Installment Sales of Livestock
• Hedging and Other Marketing Transactions
• Farm Income Averaging
• Farm vs. Nonfarm Income
• Easements
• Sale vs. Lease of Equipment by a Retiring Farmer
• Conservation Reserve Program Payments
• Income in Respect of a Decedent
• Reporting Property as Self‐rental on Schedule E (Form 1040)
• Deduction Issues
• Tangible Property Regulations
• Lease vs. Purchase of Farm Equipment
• Segregating Fertilizer Costs
• Domestic Production Activity Deduction
• Start Up Expenses
Farm Tax Seminar Topics
• Entity Issues• Partnership Formation and Contributed Assets with Debt in Excess of
Tax Basis• Guaranteed Payments• Qualified Joint Ventures• Issues for Farmers with Multiple Entities• Miscellaneous Farm Issues• Material Participation• Capitalization of Preproduction Expenses• Farm Inventory• Hobby Losses• Gift of Commodities• Valuation of growing crops• Cases and Rulings: A summary of rulings and cases from the past year
that affect farmers
Accommodations
• Quality Inn & Suites Starlite Village Conference Center
• 2601 East 13th Street, Ames, Iowa
• Discounted overnight rooms are available for $89.00 per night (for the dates of September 7, 8 and 9)
• Call the hotel at 515‐232‐9260 and mention you are attending the Iowa State University September Seminars
7/14/2016
35
Summer Webinars
• Above the Line Deductions
• Roth IRA’s
• Injured Spouse
• Preparing for an IRS Audit
• Net Operating Losses
• The Portability Election
• IRS Return Preparer Penalties Overview
• Miscellaneous Income
• New Developments
Summer Webinars
• Tax Research with Limited Resources
• IRS Representation
• Inventory Issues
• Appeals – How to Write Your Appeals Request
• Start Up Costs
• Hobby Losses
Beginning Tax PreparersClass
• CALT is working on offering a basic class for NEW tax preparers this fall in October
• The week long webinar will cover the basics an individual needs to know such as:– Requirement to file– Dependents– Filing Status– Itemized deductions– Education Credits
• Other issues a first or second year preparer needs to know as well as a refresher for others who need to brush up on issues
• The class will be a week long or more and will be offered at a special rate
7/14/2016
36
The Scoop
• Throughout the filing season two Scoops will be held on Scoop Dates– 8:00 – 8:30 am Central time– 12:00 – 12:30 Central time
• This assists with accommodating our west coast practitioners
• The same information will be shared at both sessions• You have the option of registering for whatever
session suits your schedule• https://www.calt.iastate.edu/calendar‐node‐field‐
seminar‐date/month
Future Scoop Dates
• July 20, 2016
• August 24, 2016
• September 7, 2016
• October 5, 2016
• October 19, 2016
• November 16, 2016
• December 14, 2016
• http://www.calt.iastate.edu/calendar‐node‐field‐seminar‐date/month
The CALT Staff
John D. Lawrence Interim DirectorAssociate Dean, College of Agriculture & Life Sciences Extension Programs and OutreachDirector, Agriculture & Natural Resources Extension132 Curtiss HallIowa State UniversityAmes, Iowa 50011‐1050
Kristine A. Tidgren
Assistant Director
E‐mail: [email protected]
Phone: (515) 294‐6365
Fax: (515) 294‐0700
7/14/2016
37
The CALT Staff
Kristy S. MaitreTax SpecialistE‐mail: [email protected]: (515) 296‐3810Fax: (515) 294‐0700
Tiffany L. KayserProgram AdministratorE‐mail: [email protected]: (515) 294‐5217Fax: (515) 294‐0700
