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PILLA TALKS TAXES

Dan’s newsletter Pilla Talks Taxes is published ten times per year with articles designed to help you stay current on new laws, strategies and defenses. Dan will show you how to protect and defend your clients' rights, new ways to cut taxes and how to avoid problems with the IRS. If it is important for you to know, you will find it in this newsletter! You'll be among the first to know what's going to happen, even before it happens, making you invaluable to your clients.

Pilla Talks Taxes is a must-have for any tax professional. Subscriptions are available direct from WINNING Publications, Inc. for $99/year, however TFI Members receive a free subscription as part of their membership benefits. In addition, our members are able to access a searchable archive of past Pilla Talks Taxes articles. Below is a example of the no-nonsense information you will find in Dan's newsletters.

Featured Article

IRS CAVES ON TWO-YEAR INNOCENT SPOUSE RULE

No Congressional Action Needed

It’s more fun to make the law than it is to break the law. That’s what I say. And that’s just what’s happened concerning the IRS’s innocent spouse regulations.

Regular readers of this newsletter know that I have been working for some time to bring about a change to the IRS’s two-year rule governing innocent spouse applications under code section 6015(f). That’s the provision allowing an aggrieved spouse to seek relief from a joint tax liability even if she doesn’t otherwise qualify for relief under either section 6015(b) or 6015(c). Section 6015(f) is considered the “equitable relief” provision. It’s a broad provision that gives the IRS discretion to consider the totality of a person’s circumstances in deciding whether to relieve them from a joint tax debt.

Shortly after section 6015 was created by the IRS Restructuring and Reform Act in 1998, the IRS imposed a two-year period of limitations in which to submit an application under section 6015(f). The two-year limitation period is computed beginning with the date of the first collection action taken against the innocent spouse.

The problem with this rule is that Congress never created it. The IRS created it by way of regulation. Thus, the agency, not Congress, imposed this limit upon section 6015(f) filings. The two-year rule is based on the fact that Congress did create a two-year rule covering innocent spouse submissions under both sections 6015(b) and (c). The IRS believed that Congress must have “forgot” to mention the limitation period in section 6015(f) and thus, the IRS imposed its own.

In 2009, the Tax Court, in the case of Lantz v. Commissioner, 132 T.C. 313 (2009), struck down the IRS’s two-year rule, claiming that the IRS didn’t have the authority to create such a rule. I have more details on the background of the Lantz decision in the June 2011 issue of this newsletter, as well as other past issues. See the article entitled, “MOVE AFOOT TO CLARIFY INNOCENT SPOUSE RULES: Bill Introduced in Congress to Eliminate IRS’s Two-year Rule.”

The Tax Court’s ruling in the Lantz case was appealed to the Seventh Circuit Court of Appeals, where the court reversed the Tax Court. As such, the IRS’s two-year rule was upheld as valid. That’s when I got involved with my congresswoman, Michele Bachmann. We worked up an amendment to section 6015(f) that would clarify that the two-year rule was not to apply to equitable relief applications.

We floated the bill last year but in April 2011, I met with Representative Bachmann in Washington and she then introduced the bill into Congress as H.R. 1450. Response to the bill was immediate and very positive. Even the Commissioner of IRS got behind the idea, saying that his office would review its innocent spouse polices. Numerous other lawmakers jumped on the bandwagon in support of the change.

And change happened—quickly. On July 25, 2011, the IRS’s National Office announced that it was pulling the plug on its two-year rule concerning requests for equitable relief under section 6015(f). IRS Notice No. 2011-70 simultaneously established the new rules for such claims going forward. The rules set forth in Notice No. 2011-70 are to provide transitional guidance on the issue until the IRS can formally remove the two-year rule from its regulations.

There are five essential components to these rules. I address each one in turn.

1. Future Requests. As of July 25, 2011, any person seeking relief under section 6015(f) may do so at any time during one of two periods. The first is anytime within the collection statute of limitations.

The IRS normally has ten years from the date of an assessment in which to collect the tax. Code section 6502. This ten-year period can be extended for a number of reasons. Actions that extend the statute are referred to as tolling events. In chapter ten of my book, How to Get Tax Amnesty and the Tax Amnesty Supplement, I address in full detail the collection statute and all the tolling events that extend it. Tax practitioners must be aware of these important rules as they have a direct bearing on nearly all the remedial actions we might take on behalf of our clients.

Under the new innocent spouse rules, a request for equitable relief can be made anytime the collection statute is open. Thus, the IRS may be in the final month of the ten-year collection period and you can still submit a request for equitable relief under section 6015(f). (Note however, that the submission of an innocent spouse request is itself a collection statute tolling event.)

The second period within which a future request can be submitted is the period created by the statute of limitations governing claims for refund or credit under code section 6511. Generally, a claim for refund or credit can be filed within two years of the date the tax was paid, or within three years of the date the return was filed, whichever is later. These rules are illustrated as follows:

The three-year rule. Suppose you filed your 2008 tax return on April 15, 2009. The return showed a substantial tax liability which you subsequently paid. You believe you are an innocent spouse. A claim for relief can be filed under section 6015(f) on or before April 15, 2012, which is three years from the return filing date. This is true regardless of when the IRS began collecting the debt.

The two-year rule. Suppose you filed your 2004 tax return on April 15, 2005. The return showed a substantial tax debt. On January 1, 2011, you paid the tax by liquidating an IRA. You believe you are an innocent spouse. You now have two years from January 1, 2011, in which to file a claim for refund, using the innocent spouse equitable relief provisions of section 6015(f) as the basis for the refund claim. This is true regardless when the IRS began collecting the debt.

For more details on the claim for refund process, see my book, Taxpayers’ Defense Manual, chapter five.

2. Requests that are Currently Pending. If you already have a claim for relief pending under section 6015(f), the new rules state that the IRS will consider your request for equitable relief even if it was submitted more than two years after the first collection action was taken. This is true if, at the time the request was filed, the collection statute was open under section 6502 or the claim for refund or credit limitations period was open under section 6511. See my above discussion of these periods.

It is important to note that you do not have to submit a new request to take advantage of the new rules. As long as your request is now pending and you meet the limitation periods discussed above, the IRS will consider your request on its merits and pass on it.

3. Requests that are Currently in Litigation. When the IRS denies a request for innocent spouse relief, you have the right to file a petition with the United States Tax Court to seek a review of the denial. This puts the innocent spouse claim before the Court in litigation. If your innocent spouse case is currently in litigation because the IRS denied relief under section 6015(f) due solely to the timeliness issue, the IRS is obligated under its new procedures to take such action as is necessary to correct the situation. If you are involved in litigation with your innocent spouse claim, you do not have to reapply for equitable relief. You should, however, push the IRS to agree to have the case remanded to the Appeals function for consideration of your case on its merits.

4. Requests that Were Denied Solely for Untimeliness. Many people had innocent spouse claims denied but did not litigate them for any number of reasons. If your request was denied solely because of the timeliness issue and you did not litigate the denial, you may reapply for relief under section 6015(f) anytime after July 25, 2011, the effective date of the IRS’s new rules. Reapply for relief by filing a new Form 8857, Request for Innocent Spouse Relief.

Two scenarios apply to new applications. First, as to unpaid liabilities that exist as of the date of the new application, the IRS will grant relief if the collection statute of limitations under section 6502 is open as of the date of the reapplication for relief. Of course, if the collection statute is not open, the liability is moot since the IRS can no longer legally collect the unpaid tax.

The second scenario applies to taxes that are paid. Under the rules set out in Notice No. 2011-70, the IRS must treat the date of filing your original Form 8857 as a claim for refund for purposes of the refund statute of limitations provided in code section 6511. Under this rule, a refund that was available as of the date the original Form 8857 was filed, and any subsequent payments, will be refunded if the IRS grants your request for equitable relief on its merits.

5. Requests that Were Litigated but are Now Final. Many people have litigated their innocent spouses cases and lost. In certain of these cases, the IRS will take no further collection action, as long as the timeliness issue was the only matter in question in the litigation. In other words, if the IRS agreed in the context of the litigation that you would have been entitled to equitable relief but for the timeliness issue, it will not purse further collection under its new directive.

For this to apply, the IRS must have stipulated (formally agreed) in the court proceeding that your request for equitable relief would have been granted had the request been timely. Under that condition, the IRS will not attempt to collect the balance of any remaining liability. You’ll simply walk away from the debt.

If your case falls within this guideline, you do not have to reapply for equitable relief. However, under this rule, the IRS will not issue any refunds or credits. Thus, relief under this element of the new rules is prospective only.

Conclusion

Keep in mind that the rules created under Notice No. 2011-70 apply only to tax liabilities for which equitable relief would have been granted under section 6015(f), but for the timeliness issue. These rules expressly do not apply to other innocent spouse issues.

However, in any situation where you are faced with the collection of delinquent taxes that you cannot pay, you must consider relief under other collection alternatives, such as an installment agreement, uncollectible status or an Offer in Compromise. For all the details on these programs and more, see my Tax Amnesty book.

IRS Notice No. 2011-70 is an important victory for taxpayers’ rights. Countless thousands of citizens will now get the benefit of innocent spouse relief that they otherwise would not have obtained. And the best part of this is that it did not take drawn out congressional action, hearings and debates to get it done. Nor did the matter have to end up at the Supreme Court, where it undoubtedly was headed, given the history of the litigation. We owe Congresswoman Bachmann a debt of thanks for spearheading this battle with me on behalf of taxpayers’ rights.

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Featured Article

LEVY OF SOCIAL SECURITY BENEFITS 
IRS To Limit How Much It Will Seize

A common question with delinquent citizens is whether the IRS can levy social security benefits. The answer, unfortunately, is yes they can, and worse, they do so regularly. Before intercepting an SS payment, the IRS generally sends notice CP91, Final Notice Before Levy On Social Security Benefits. This letter informs you of the impending levy and invites you to call the IRS to set up payments if you cannot pay in full. 

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