IRS Issues Rev. Proc. 2013-34

Updated guidance for taxpayers seeking equitable relief from section 66(c) or sec. 6015(f) of the Internal Revenue Code

Revenue Procedure 2013-34 provides update guidance regarding the circumstances under which equitable relief will be granted. It supersedes Rev. Proc. 2003-61 and makes significant changes to when and how relief will be considered and granted.

equitable relief

On September 21, 2013, the Internal Revenue Service (IRS) issued Rev. Proc. 2013-42, which provides guidance for a taxpayer seeking equitable relief from income tax liability under section 66(c) or section 6015(f) of the Internal Revenue Code.  This 27-page document will be a  “must read” for both litigation support  professionals—focused on tax and family law—as well family law and tax counsel.  The article provides an overview of some of the changes.  Significantly for our present purposes, section 4.02 of this revenue procedure sets forth the conditions under which the IRS will make streamlined relief determinations granting equitable relief under section 6015(f) from an understatement of income tax or an underpayment of income tax reported on a joint return, or the operation of community property law under section 66(c).

By way of background, IRC Section 6013(d)(3) provides that married taxpayers who file a joint return under section 6013 will be jointly and severally liable for the income tax arising from that joint return. For purposes of Section 6013(d)(3) (and also this revenue procedure), the term “tax” includes penalties, additions to tax, and interest. See Sections 6601(e)(1) and 6665(a)(2).  While there is liability, Section 6015(b) and (c) specify two sets of circumstances under which relief from joint and several liability is available in cases involving understatements of tax. Section 6015(b) is modeled after former section 6013(e), the prior innocent spouse statute, and section 6015(c) provides for separation of liability for taxpayers who are no longer married to, are legally separated from, or not living together with the person with whom they filed a joint return. If relief is not available under Section 6015(b) or (c), Section 6015(f) authorizes the secretary to grant equitable relief if, taking into account all the facts and circumstances, the secretary determines that it is inequitable to hold a requesting spouse liable for any unpaid tax or any deficiency (or any portion of either).

Section 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. Section 3201(b) of the RRA Amended Section 66(c) to add an equitable relief provision similar to Section 6015(f). Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid, and there is no valid return with respect to the requesting spouse. The individual is not jointly and severally liable for any income tax liabilities arising from that return. In that case, Section 6015 does not apply and is not necessary for obtaining relief. If an individual files a claim for relief under Section 6015, but also maintains that there is no valid joint return due to duress, the service will first make a determination as to the validity of the joint return and may accordingly deny the request for Section 6015 relief based on the fact that no joint return was filed (and thus, relief is not necessary). If it is ultimately determined that a valid joint return was filed, the service will then consider whether the individual would be entitled to relief from joint and several liability on the merits.

Under Section 6015(b) and (c), relief is available only from an understatement or a deficiency. Section 6015(b) and (c) do not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief from an underpayment of income tax or from a deficiency. The legislative history of section 6015 provides that Congress intended for the secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse “does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse’s benefit.” H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for the secretary to exercise the equitable relief authority under Section 6015(f) in other situations if, “taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return.” Id.

Rev Proc. 2013-34 supersedes Rev. Proc. 2003-61. The structure and format of this revenue procedure generally follows that of Rev. Proc. 2003-61 with the following significant changes:

• This revenue procedure gives greater deference to the presence of abuse than Rev. Proc. 2003-61. The service recognizes that the issue of abuse can be relevant with respect to the analysis of other factors and can negate the presence of certain factors. This change is intended to give greater weight to the presence of abuse when its presence impacts the analysis of other factors.
• A request for equitable relief under section 6015(f) or section 66(c) must be filed before the expiration of the period of limitation for collection under section 6502 to the extent the taxpayer seeks relief from an outstanding liability, or before the expiration of the period of limitation for credit or refund under section 6511 to the extent the taxpayer seeks a refund of taxes paid. This is a significant change to the requirement in Rev. Proc. 2003-61, section 4.01(3), and Treas. Reg. § 1.6015-5(b)(1) (TD 9003), that the requesting spouse’s claim for equitable relief must be filed no later than two years after the date of the service’s first collection activity.
• The attribution threshold condition (contained in Section 4.01(7) of this revenue procedure) adds a new exception in paragraph (e) to the requirement that the income tax liability must be attributable to an item of the non-requesting spouse. Under Section 4.01(7)(e) of the revenue procedure, relief will not be precluded for an item attributable to the requesting spouse if the non-requesting spouse’s fraud gave rise to the understatement of tax or deficiency.
• Streamlined determinations under Section 4.02 of this revenue procedure now apply to understatements of income tax instead of only underpayments as under Rev. Proc. 2003-61. Section 4.02 also now applies to claims for equitable relief under section 66(c).
• Section 4.03(2) of this revenue procedure clarifies that no one factor or a majority of factors necessarily controls the determination. Therefore, depending on the facts and circumstances of the case, relief may still be appropriate if the number of factors weighing against relief exceeds the number of factors weighing in favor of relief, or a denial of relief may still be appropriate if the number of factors weighing in favor of relief exceeds the number of factors weighing against relief.
• The economic hardship factor in section 4.03(2)(b) of this revenue procedure now provides minimum standards based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. Further, Section 4.03(2)(b) also now provides that the lack of a finding of economic hardship does not weigh against relief, as it did under Rev. Proc. 2003-61, and instead will be neutral.
• The knowledge factor for underpayment cases in Section 4.03(2)(c)(ii) of this revenue procedure now provides that, in determining whether the requesting spouse knew or had reason to know that the non-requesting spouse would not pay the tax reported as due on the return, the service will consider whether the requesting spouse reasonably expected that the non-requesting spouse would pay the tax liability at the time the return was filed or within a reasonable period of time after the filing of the return. This is an important new development.   This provision was added in response to comments received with respect to Notice 2012-8, Section 4.03(2)(c)(ii) which provides that a requesting spouse may be presumed to have reasonably expected that the non-requesting spouse would pay the liability if a request for an installment agreement to pay the tax was filed by the later of 90 days after the due date for payment of the tax, or 90 days after the return was filed. Further, Section 4.03(2)(c)(ii) clarifies that for purposes of this factor, if 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, and because of the abuse or financial control, the requesting spouse was not able to question the payment of the taxes reported as due on the return or challenge the non-requesting spouse’s assurance regarding payment of the taxes for fear of the non-requesting spouse’s retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know that the non-requesting spouse would not pay the tax liability. Finally, Section 4.03(2)(c)(ii) provides that if the requesting spouse did not reasonably expect that the non-requesting spouse would pay the tax liability reported on an amended return that was based on items not properly reported on the original return, the service will also consider whether the requesting spouse knew or had reason to know of the understatement on the original return.

Section 4, General Conditions for Relief, provides important guidance regarding the threshold conditions to be eligible for equitable relief under section 6015(f). With the exception of conditions (1) and (2), a requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 66(c). The service may relieve a requesting spouse who satisfies all the applicable threshold conditions set forth below of all or part of the income tax liability under section 66(c) or section 6015(f) if, taking into account all the facts and circumstances, the service determines that it would be inequitable to hold the requesting spouse liable for the income tax liability. The threshold conditions are as follows:

1. The requesting spouse filed a joint return for the taxable year for which he or she seeks relief.

2. Relief is not available to the requesting spouse under Section 6015(b) or (c).

3. The claim for relief is filed in a timely manner:

a. If the requesting spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made on or before the Collection Statute Expiration Date (CSED).  The CSED is the date the period of limitation on collection of the income tax liability expires, as provided in Section 6502. Generally, that period expires 10 years after the assessment of tax, but it may be extended by other provisions of the Internal Revenue Code.
Claims for credit or refund of amounts paid must be made before the expiration of the period of limitation on credit or refund, as provided in Section 6511.  Generally, that period expires three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

4. No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.
5. The non-requesting spouse did not transfer disqualified assets to the requesting spouse. For this purpose, the term “disqualified asset” has the meaning given the term by Section 6015(c)(4)(B). If the non-requesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets. Even if there was a transfer of disqualified assets, the requesting spouse may be eligible for relief if 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, or the requesting spouse did not have actual knowledge that disqualified assets were transferred.
6. The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.
7. 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. If the liability is partially attributable to the requesting spouse, then relief can only be considered for the portion of the liability attributable to the non-requesting spouse. Nonetheless, the service will consider granting relief regardless of whether the understatement, deficiency, or underpayment is attributable (in full or in part) to the requesting spouse if certain exceptions not listed here apply.

The revenue procedure lists a number of factors (non-exclusive) that will be considered determining whether to grant full or partial equitable relief and additional information regarding the application in underpayment and understatement cases.  Again, this is a must read for professionals involved in tax and matrimonial law cases.  The link to Rev. Proc. 2013-34 enumerates the items. In addition, this revenue procedure is effective for requests for relief filed on or after September 16, 2013. In addition, this revenue procedure is effective for requests for equitable relief pending on September 16, 2013 whether with the service, the Office of Appeals, or in a case docketed with a federal court.

[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/3/000/06d/3ed/2a369a3.jpg[/author_image] [author_info]Roberto Castro, Esq., MST, MBA, CVA, CPVA, is a managing member of Wasatch Business Valuation & Litigation Support Services, LLC and a Washington State attorney.  Wasatch Business Valuation provides business valuation, term sheet analysis and exit planning services, and litigation support/economic damages analysis.  His legal practice focuses on bankruptcy, estate and gift, succession planning, ERISA, healthcare, and M & A/transactional services. Roberto can be reached at RobertoC1@NACVA.com[/author_info] [/author]