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IRS Issues Chief Counsel Notice Regarding Litigation of Innocent Spouse Cases

In light of recent United States Tax Court decisions and subsequent affirmation by the Ninth Circuit Court of Appeals, the IRS has issued a notice to Chief Counsel Attorneys informing them of how to proceed with innocent spouse cases and the standards of review to expect from the Tax Court.

In "innocent spouse" cases, taxpayers find-to their surprise-that they are liable for the tax debt of a former spouse. The law has created equitable relief (or relief that is meant to provide for fairness and justice) for these aptly named "innocent spouses" so that they are not held liable for the indebtedness of former spouses.

Previously, the IRS would argue that the scope and standard of review of the Tax Court was limited to finding relief only where the IRS had abused its discretion and based solely on evidence from the administrative record. In a series of rulings, the Tax Court found that the court reviews the case de novo, or as if the question was being presented for the first time. In ruling that this standard of review is to be used, the Tax Court said that it can look at evidence supplied by the petitioner outside of the administrative record and that the court could also review granting relief regardless of whether the IRS has made a determination on that issue yet. The Ninth Circuit Court of Appeals in Wilson v. Comm'r affirmed this decision.

Due to the appellate court affirmation, the IRS has decided to stop challenging or arguing that ruling, and instead has issued this new notice for how trial attorneys ought to proceed. Interestingly, instead of simply backing down and requesting that Chief Counsel Attorneys allow the trial court to apply its standard of review; the IRS says that the trial attorneys "should continue to work with petitioners to stipulate to evidence in the administrative record that is relevant to the court's determination regarding section 6015 relief." In other words, try very hard to keep the evidence to only the administrative record.

While this process is also quite adversarial in nature much like most litigation in the United States, there is much more communication between the IRS Chief Counsel Attorneys and the petitioners. The remainder of the note goes on to break down the different scenarios such as whether the IRS has made a determination before the case has been brought before the Tax Court, whether the IRS denied relief, whether the non-requesting spouse has intervened or is a joint petition, whether the non-requesting spouse agrees with the IRS's relief determination and the requesting spouse's complaint, and whether the trial attorney agrees with the IRS's decision on relief. The trial attorneys are also empowered to make settlements and prevent trials as much as possible, while also preparing for the potential inevitability of trial.

What this means is that the IRS has not been cowed by the court rulings; they will continue to push for administrative evidence to be the sole form of evidence admitted to trial. This is hardly surprising. From a litigation context, it makes sense to prevent evidence that could be damaging to your case from being admitted, especially if the only evidence traditionally submitted is created by the very agency you represent. However, the Tax Court and Ninth Circuit are making it clear that it is the task of a court of law to determine what evidence can and cannot be submitted, and also the task of a court of law to determine how best to review decisions of law. These are time-honored principles, which probably explains why the IRS decided against battling the decision.

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