A day late, a dollar short

The inequities of equitable relief under Sec. 6015(f)
By Alexander Kleyman, CPA, and Paul Zambito, CPA

Taxpayers seeking innocent spouse relief under Sec. 6015 could face an unexpected consequence when there is no remaining tax liability for a tax year but for which additions to tax, penalties, and/or interest are still owed.

Generally, spouses who file a joint tax return are jointly and severally liable for the tax on the return, including additions to tax, penalties, and interest. Congress enacted Sec. 6015(f) to provide relief from joint and several liability when, taking into consideration all the facts and circumstances, it is inequitable to hold the spouse liable for an understatement or underpayment when other relief provisions do not apply. However, two slightly different circumstances may be treated differently under the Sec. 6015(f) criteria for equitable relief.

Suppose that Mary filed a joint tax return with her husband in which all income was attributable to her husband. The return was filed five months past its due date, although the husband paid the full amount of tax owed of $100,000. However, he did not pay the late filing penalties, the late payment penalties, and the interest. Subsequently, Mary, now divorced from her husband, files for equitable relief under Sec. 6015. Based on the facts and the criteria under Sec. 6015(f), Mary would qualify for equitable relief of a tax deficiency. However, she is denied relief and must pay the amounts owed, solely because the tax owed at the time the joint return was filed was "full paid" at the time of filing.

Internal Revenue Manual (IRM) Section 25.15.3.8.1 states, "If the original return was full paid when filed, then there is no underpayment of tax, therefore, no relief is available under IRC 6015."

Alternatively, consider an identical scenario, except that the husband paid $99,999 of tax owed at the time the joint return was filed, meaning the return was $1 short of being "full paid." Mary meets all the qualifications for equitable relief from paying the late filing penalties, late payment penalties, and interest—even if the remaining dollar of underlying tax liability had been subsequently paid.

IRM Section 25.15.3.8.1(5) also states:

If relief would have been appropriate for the underlying tax, then relief is appropriate for the penalties and interest. This includes situations where there was an underpayment of tax on the return but subsequent payments have paid all the tax leaving only penalty and/or interest unpaid or partially unpaid. If the [requesting spouse] would be entitled to relief, then the [requesting spouse] may be considered for a refund (including a refund of any paid penalties and interest) and would be entitled to relief from the unpaid penalties and interest.

Prop. Regs. Sec. 1.6015-1(m), issued in November, would make the IRM's stance official: "If the underlying tax liability (whether an assessed deficiency or an underpayment) was paid in full after the joint return was filed but penalties and interest remain unpaid, the requesting spouse may be relieved from the penalties and interest if the requesting spouse is entitled to relief from the underlying tax."

When a taxpayer does not qualify for innocent spouse relief because the tax liability was "full paid" at filing, penalty relief may be available under reasonable-cause rules. IRM Section 25.15.7.5.8 states, "Although no relief is available separately for penalties under IRC 6015, under the right circumstances penalties can be abated for reasonable cause. ..."

However, Tax Court cases suggest that penalty abatement for reasonable cause in such circumstances may be much more difficult to obtain than innocent spouse equitable relief. In Belk, 93 T.C. 434 (1989), the wife had no income or deductions during the year, the husband had historically taken full charge of preparing and filing the returns, and the wife had historically not examined or inquired about the couple's returns before signing them. The court held those reasons supported a holding that the wife was entitled to innocent spouse relief, but not that she had reasonable cause for the couple's joint return having been filed late, since she did not take steps to ensure that her husband had timely filed it.

If a spouse can receive abatement from the penalties and interest, collecting the refund may be another story. A refund as a result of an overpayment created by an abatement is not allocated to a specific spouse. IRM Section 21.4.1.4.9.2 states, "The government does not determine who is entitled to which portion of the refund check." Thus, when the IRS refunds an overpayment shown on a joint return, it typically issues the refund in the names of both spouses, leaving them to divide the proceeds.

A key point that a practitioner can take away from these examples is that absent a change in the statute, a spouse will not be entitled to equitable innocent spouse relief if a tax due amount was fully paid at the time of filing, even if that filing was late. This may happen more than tax preparers realize, as taxpayers often pay the tax due yet leave the penalty and interest calculation to the IRS.

Alexander Kleyman (kleymancpa@aol.com) is a sole practitioner with Alexander Kleyman, CPA, in Hallandale Beach, Fla. Paul Zambito (paul.zambito@mossadams.com) is a senior manager at Moss Adams LLP in Los Angeles.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.

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