In several past issues of this newsletter, I have written much about the Tax Court’s decision in the case of Lantz v. Commissioner,132 T.C. 131 (2009). I’ve also discussed this case at various times in my Taxpayers’ Defense Conferences. The decision in this case strikes a very important, very positive blow for taxpayers’ rights. Let me give you some background.
The Lantz decision involves the innocent spouse rules set forth in code section 6015. Code section 6015 sets up three different scenarios under which a person can get relief from a joint income tax debt. A joint debt is created when you file a tax return with your spouse as married filing jointly. Under the joint debt rules, even if just one spouse earned the income, both are fully liable for the tax if they elect joint filing status.
Why would people do that? The main reason is that the tax rates for married filing jointly are substantially lower than those for the other filing categories. I have long believed that Congress essentially pays off married couples in the form of lower tax rates to induce them to elect joint filing status. The advantage for the government is they now have two potential collection points for the same tax, rather than just one. In short, the tax becomes easier to collect when both spouses are liable as opposed to just one spouse being liable.
The sad fact of the matter is that most people elect to file as married filing jointly without considering the consequences of their filing status. Even most tax preparers elect the married filing jointly status without considering the consequences. This is a mistake. You must understand what happens in a joint filing situation before filing joint returns. This is especially true in cases of delinquent tax returns showing a balance due. Because of the importance of this issue, I am featuring an article entitled, “JOINT RETURN OR MARRIED FILING SEPARATELY: Beware of the ‘Easy’ Answer” by Paul Tom. See the article below. While Paul’s article is addressed to tax preparers, its teaching is important to anybody who files tax returns.
Under the innocent spouse rules, one spouse can be relieved of a joint tax liability under any of three scenarios. They are:
- The tax is attributable to income earned or deductions claimed by the first spouse but which the innocent spouse did not know or have reason to know about. I refer to this traditional innocent spouse relief. Code section 6015(b).
- When an innocent spouse has been legally divorced, separate or otherwise living apart from her former spouse for at least
one year, the innocent spouse can make an election to change the joint return to a separate return. That leaves the innocent spouse liable only for the tax owed on her separate income. I refer to this as the separate spouse election. Code section 6015(c).
- If an innocent spouse does not qualify under the statutory guidelines for relief under either paragraph 1 or 2 above, the spouse may qualify for “equitable relief.” That is to say, that given all the facts and circumstances of the case, it is unfair to hold the innocent spouse liable for the tax and she should be relieved of the liability. This is referred to as equitable relief. Code section 6015(f).
Code section 6015 specifically provides a period of limitations in which innocent spouse treatment may be sought. Code section 6015(b)(1)(E) provides that a request for traditional innocent spouse relief must be sought within two years of the date the IRS first begins collection action against the innocent spouse. Code section 6015(c)(3)(B) states that a request for a separate spouse election must be made within two years of the date of the first collection action against the innocent spouse.
However, code section 6015(f) does not specify any time by which a request for equitable relief must be filed. The statute is silent as to a limitations period. Does that mean that the same two-year rule would apply as set forth in the other two provisions? The assumption is no, since section 6015(f) is specifically intended to apply to innocent spouses to whom “relief is not available … under subsection (b) or (c).” Code section 6015(f)(2).
For example, suppose you missed your statute of limitations for an application to win a separate spouse election under section 6015(c). You might nevertheless be able to achieve that relief under section 6015(f) because “relief was not available” due to having missed the deadline. Given the broad language of the equitable relief portion of the statute, Congress clearly intended this as a very broad net into which just about any innocent spouse might jump to seek refuge from a joint liability.
Sometime after Congress passed the innocent spouse rules outlined above, the IRS wrote regulations to put the legal provisions into affect. The regulations are intended to implement the statute by giving meaning to the rules set up by Congress. As such, the IRS created forms and procedures by which to make the applications provided for by the statute.
The general rule regarding regulations is that an administrative agency, such as the IRS, may create regulations to carry out the duties imposed on the agency by the enabling statute. However, the regulation may not create duties, obligations or limitations that Congress did not intend. Said another way, the regulation may not be broader than the statute under which the regulation is promulgated. Think of a regulation as a mere tool to implement the intent of Congress as opposed to a new rule created out of thin air.
In its regulations governing the equitable relief provision of code section 6015(f), the IRS created a statute of limitations. The IRS provided by regulation that the application for equitable relief had to be made within two years of the first collection action carried out against the innocent spouse. The IRS imposed, by regulation on the equitable relief provision, the same limitations period that Congress imposed on the other two modes of relief under the law.
The problem is that Congress never specified a statute of limitations on seeking equitable relief. As I stated, Congress intended the equitable relief provision to be very broad and applicable in cases where the other two modes of relief were unavailable. Thus, the IRS created a rule out of thin air that Congress never intended. As such, the IRS went well beyond its regulatory authority.
This issue was presented to the Tax Court in the Lantz case. And as it should have, the Tax Court struck down the IRS’s regulation as being over-broad and beyond the scope of what Congress intended.
Not surprisingly, the IRS appealed the decision. The appeal went to the United States Court of Appeals for the Seventh Circuit. In its 2010 decision, the Seventh Circuit reversed the Tax Court, saying that the IRS was perfectly within its rights to create a statute of limitations even though Congress didn’t specify one in the statute. See Lantz v. Commissioner, 607 F.3d 427 (7th Cir. 2010).
Shortly after the Seventh Circuit’s Lantz decision was issued, I got on the phone with my Congresswoman, Michele Bachmann, of Minnesota’s sixth congressional district. I was concerned about two things. First, the Tax Court was correct; the IRS overstepped its bounds. Second, as innocent spouse litigation continues, certain courts would agree with the Tax Court and others would agree with the Seventh Circuit. This would create a split among the circuits leading to a situation where different rules of law applied to the same set of facts and circumstances. The question of whether an individual would get relief in his particular case would end up depending solely and exclusively on where he lived. The situation could be fixed either by Congress or the Supreme Court. But for the Supreme Court to act, it would take years. By then, untold numbers of innocent spouses could be deprived of relief they are entitled to.
I explained the situation to Congresswoman Bachmann and she understood the problem immediately. She is an experienced tax attorney in her own right and a committed advocate for taxpayers’ rights and limiting the power of the IRS.
Together we crafted a bill that she would introduce in Congress to correct the current injustice. And that she did. The bill is H.R. 1450 and is co-sponsored by Mike Fitzpatrick of Pennsylvania, along with a number of others in Congress. Senator Charles Grassley is also behind the bill. Grassley was a member of the Senate Finance Committee when the original law was passed. Even the National Taxpayer Advocate is behind the measure.
Now you need to get behind the measure as well. Write to your Congressman and Senators. Tell them to support H.R. 1450. Remind them that innocent spouses deserve all the legal protection they can get and that everybody should be treated equally under the law. Do it now.
You can write any congressman as follows:
Office of Representative (Name)
U.S. House of Representatives
Washington, DC 20515
To find the e-mail address of your congressman, go to:
You can write any senator as follows:
Office of Senator (Name)
United States Senate
Washington, D.C. 20510
To find the e-mail address of your senators, go to:
LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?
Dan Pilla's monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS,
exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!
An email address is needed to receive this newsletter.
10 issues per year. $99.00 per yr Order Now!