IRS Finalizes Changes to Innocent Spouse Rule

Marriage means many things – but not always that two people are in complete concert on tax matters. That is why federal law allows an innocent spouse to avoid being held responsible for his or her spouse’s tax problems.

Sometimes it takes an experienced tax attorney to convince the IRS to provide the innocent spouse tax relief that it should.

In one recent case, a woman named Cathy Lantz filed a joint tax return with her husband, an Indiana dentist, in 2006. It turned out that the husband was engaged in Medicaid fraud. Ms. Lantz argued that she had no knowledge of this, but the IRS still tried to hold her liable for all tax, penalties and interest on the joint return.

The tax bill that the IRS sought to enforce was nearly $1 million – $928,111, to be exact.

After a five-year battle in tax court and then in federal court, the IRS finally decided to drop the case last summer. The tax law clinic at Valparaiso University School of Law helped Cathy Lantz obtain innocent spouse relief.

The IRS action appears to signal a shift in policy on innocent spouse cases. The agency has already adopted new guidelines, and is accepting public comments on the revised rules.

The biggest change is that the IRS will be more inclined to allow equitable relief to an innocent spouse taxpayer in two key situations. One is when a spouse has suffered abuse at the hands of the other spouse. The other is when one spouse has exercised control of the couple’s finances.

Source: “For ‘Innocent Spouses,’ A Helpful Shift in I.R.S. Policy,” Carla Fried, New York Times, 2-11-12