The Intersection of Innocent Spouse Relief and Offers in Compromise

5 Flares Filament.io 5 Flares ×

In Harris v. Commissioner, T.C. Summ. Op. 2017-77, the Tax Court denied a request for innocent spouse (IS) relief to a petitioner whose wife had obtained an offer in compromise (OIC) for the liability from which he sought relief. The Court found that her OIC did not pave the road for him to obtain IS relief. Because the Harvard clinic, like most low income tax clinics, does a high number of OICs and a lesser but still substantial number of IS cases, I read the opinion with interest. I do not remember a previous case in which these two forms of relief from the collection of an assessed liability crossed paths in precisely this manner.

read more...

Mr. and Mrs. Harris got married on December 21, 2012, and continue to reside together in marital harmony at the time of the IS trial in Mr. Harris’ case. The opinion does not discuss whether the timing of their wedding sought to obtain tax benefits available from joint filing or if the timing of the wedding was somehow inextricably driven by factors other than tax. They timely filed their 2012 return (already I am pulling for them – this fact alone makes them an unusual couple to be discussing on the electronic pages of PT.) In 2012, Mr. Harris received wages of $3,877 and non-employee compensation of $3,074 while Mrs. Harris netted $71,784 from three Schedule C businesses. Though they timely filed and made some remittance, they still owed $4,295 of the taxes reported on their return. Both husband and wife participated in filing the return and both knew that their taxes were not fully paid.

In subsequent years, they continued to timely file their returns and Mrs. Harris continue to earn the lion’s share of the family income from her Schedule C businesses. For the year 2013, Mrs. Harris failed to report about $45,000 she received from a distribution from a retirement account. This resulted in an additional assessment for that year. Mrs. Harris also brought into the marriage unpaid taxes for several years. She owed taxes for failure to remit, and she had entered into and defaulted on installment agreements during those years because she continued to fail to make estimated payments.

She decided to request an offer in compromise. Mr. Harris knew about her decision. She submitted an offer for the years 2007 through 2012 (the year of their first joint return.) After some back and forth, the IRS accepted her OIC for a lump sum payment of $7,458 on April 14, 2014. It’s hard to make informed decisions based on limited information but I am shocked that the IRS accepted an offer of this amount given that her 2012 income was $71,784 and her 2013 income was $106,410. Her monthly income leading up to the OIC would have been almost $9,000. Even though she may have had no assets, I would have expected her reasonable collection potential to be approximately $3-5,000 x 12. I am not sure if I want to start having my offers worked in Memphis, send my offers out to whoever prepared hers, or both. Despite my surprise at the amount of the offer, the fact is the IRS accepted it and it may have been a great deal for the IRS for all I know.

The OIC only covered Mrs. Harris and did not cover Mr. Harris. He came to regret this fact and he became very interested in obtaining an OIC himself. He filed doubt as to liability OICs in the four consecutive months of October 2014 through January 2015. The IRS denied each of the OICs, stating that he did not raise an “issue regarding the accuracy or correctness of your tax liability.”

In March of 2015, he took a different tack and filed a request for IS relief. He put in this request that Mrs. Harris should have included him in the OIC she submitted. The IRS denied his request for relief and he filed a Tax Court petition. Mrs. Harris chose not to intervene. Because this is an underpayment case, Mr. Harris needs to obtain relief under IRC 6015(f). The Court looked at Rev. Proc. 2013-34 and the seven conditions listed there. While noting that the factors do not bind the Court, it went through them and found two did not favor relief and five were neutral or weigh slightly against relief. Additionally, the Court pointed out that Mr. and Mrs. Harris left income off their 2012 (his) and 2013 (hers) returns.

Mr. Harris argued that it would be inequitable to hold him liable for the 2012 liability because he should have been included on the OIC. After looking at the circumstances, the Court determined that he was not entitled to 6015(f) relief. The failure to include him on the OIC did not result from fraud or deceit on the part of either Mrs. Harris or the IRS. While it was unclear why he was not included, the failure does not form the basis for IS relief. The result is logical. If he wanted to be on his wife’s OIC, he should have affirmatively taken steps to make it happen. Even if 2012 got added to the OIC at the last minute, the failure to include him does not form the basis for relief through the IS process.

The Court described the four OICs he submitted as being doubt as to liability OICs. Perhaps he should seek to file a doubt as to collectability OIC instead. Mrs. Harris income continues to be relatively high and that may prevent him from obtaining an OIC, but his chances seem better in the collectability realm and non-existent on the liability front. The case points to the need for spouses to coordinate their efforts to obtain relief from the IRS. It is not unusual for one spouse to need relief for liabilities existing before the marriage or separate liabilities during the marriage. In seeking that relief, the spouses need to talk to each other and to professionals. It may be that they need to talk to separate professionals because their interests do not perfectly align. Here, the failure to properly set up her OIC leaves him holding the bag for a liability created by her income. This is both an unfortunate and an avoidable result.

 

 

Comments

  1. The current case on which Keith blogs is not the first time I have heard of the combination of one spouse getting an OIC and the other seeking 6015 relief. In my clinic, I had the issue of one spouse being the sole source of the liability, and she got an OIC after she became disabled. Then, the IRS pursued the other spouse, who came to my clinic after the wife prepared for him and filed a Tax Court petition under 6015 (a petition he signed). Luckily, I got the IRS to concede the case of the husband. In the case, the wife felt terrible about the situation and totally supported her husband’s relief.

  2. frank donahue says:

    Interesting case and facts leading to the husband’s decision to file DTL Offers rather than DTC. (Even though they had the joint liability, as his wife owed for previous years they would need to have filed separate F 656’s- though their Offers would have been considered concurrently.) The former Revenue Officer and Offer Specialist in me suspects that the husband has assets that have precluded him from filing a DTC OIC……

  3. Marty Davidoff says:

    Cogent analysis. Thanks!

  4. Norman Diamond says:

    We need OICs for persons who don’t owe any tax. One time I looked at the possibility of my wife filing for Doubt as to Liability, but the jurat at the bottom of the form asserts that the filer is liable, which kind of defeats the purpose.

    Prior to 2014, instructions on Form 8857 prevented my wife from using that form, and instructions on the other form for innocent spouse relief also prevent using it. My wife used to reply to IRS letters at addresses where the letters said to reply, which differ from the address where Form 8857 should be sent. The IRS always ignored her letters (as they ignored most of mine). Finally I learned about section 6015(f), probably from this blog. During court proceedings the IRS pointed out that Form 8857 was revised in 2014 and my wife can use the new version. However, before Tax Court dismissed for lack of jurisdiction, the IRS acted on its own to abate the claim against my wife and started attacking me again.

    This is a fair result because I was the one who frivolously believed that we were supposed to tell the truth on US tax returns (her only connection to the US was being my spouse). Even when the Federal Circuit ruled that I had been frivolous for failing to fabricate a US social security number for her, I was the frivolous person not her. But why did she need a court case, and why did action finally come as a result of a case that was heading for dismissal due to lack of jurisdiction.

    I wondered if this was the only case where a person sought innocent spouse relief and the other spouse paid the filing fee, but maybe the Harrises did the same.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*