WSJ: A New Push to Protect Innocent Spouses

Wall Street Journal, A New Push to Protect Spouses, by Laura Saunders:

In an era of high-profile financial crime, [Lantz v. Commissioner, No. 09-3345 (7th Cir. June 8, 2010)] and other cases are prompting calls for revision of the tax code’s innocent-spouse rules, which define when the signer of a joint return won’t be held responsible for a partner’s tax misdeeds. While National Taxpayer Advocate Nina Olson has pushed for rule changes for years, recently lawmakers from both parties in Congress have taken up the issue. …

Some 50,000 taxpayers a year ask the IRS for innocent-spouse relief. Most are women under financial pressure, and some come from privileged backgrounds. … The IRS denies about 2,000 of those cases because, like Ms. Lantz, the applicants missed the agency’s two-year deadline.

IRS critics say Congress never meant that two-year deadline to apply in all cases. When lawmakers last addressed the issue in 1998, they included two rationales for innocent-spouse relief with such a deadline but added a third without a deadline, giving the IRS leeway for special cases.

The IRS, however, has applied the two-year deadline to all requests since then—despite the disapproval of lawmakers like Sen. Charles Grassley (R., Iowa), who was on the Finance Committee when the revision passed. Tax Court judges have repeatedly held in taxpayers’ favor on this issue, although two appeals courts have overturned the Tax Court. More appeals cases are underway.

While the outcome of possible changes is unclear, experts have advice for spouses with current worries:

Those suspecting their partners of tax misdeeds should avoid signing a joint return. …

Ex-spouses should know the IRS can legally disregard a divorce decree. …

Get help from a tax professional for filing IRS Form 8857 for innocent-spouse relief. …

Taxpayers who can’t or won’t take action because of fear of reprisal or threats made by their partners should keep a diary or share fears with someone else.