IRS in Action: Fixing the Injured Spouse EIP Issue

August 31, 2020 by 20 Comments

One of the most frequent problems I’ve seen this summer has been the IRS taking “joint” EIP payments and applying all of it to one of the spouses back-due child support where the other has no such obligation. This is the prototypical “injured spouse” scenario, and in these difficult economic times it has taken on an even greater importance.

On Tuesday, August 25 the IRS issued a news release stating that roughly 50,000 injured spouses would, at long last, be receiving the EIP that had been applied to child support. This issue has been covered numerous times on Procedurally Taxing here, here, and here, and has seen a tremendous response in the comments sections to each post. This post will give a brief recap of what the IRS news release says, and what comes next.

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The IRS previously gave indications that they were going to start working (in earnest) on resolving the problem. As Keith previously discussed, a National Taxpayer Advocate blog post suggested a late-August timeframe for the IRS fixing many of these issues. Late-August has essentially come and gone, and the IRS news-release now anticipates payments being sent “early-to-mid-September.”

Hopefully the IRS meets this timeline. But it is important to note that even if it does, this timeline only applies for some, and not all, injured spouses. For the purpose of issuing the EIP, it is best to think of three tiers of injured spouses: (1) those that the IRS already has an “injured spouse indicator” on file for, (2) those that have an injured spouse indicator in queue, and (3) those that never filed the injured spouse form at all. As we’ll see, tiers two and three may be virtually indistinguishable from a practical perspective, and only the first tier should receive the payment by early-to-mid-September. So, naturally, one wonders: how do you get in the first tier?

(Before I go any further, please note that the IRS doesn’t actually or explicitly have these “tiers” and is not taking any preferential actions for some taxpayers over others. I am just suggesting the concept as a helpful way to consider who can expect payments sooner than later.)

Tier One of Injured Spouse Relief – You’ve Told the IRS You’re an Injured Spouse, and They Heard You

The first tier is for those individuals where the return information the IRS used to issue the EIP already indicated that they were an injured spouse. I take this to mean that if you filed a 2019 return with a (likely electronic) injured spouse form the IRS knows about it and is making the fix. But since the EIP also (sometimes) pulls in 2018 information, exactly who falls into the first tier isn’t crystal clear.

The IRS news release says that if you filed a 2019 return with an injured spouse form you don’t need to take any action and should receive the payment. What if your 2019 return doesn’t have an injured spouse allocation, but 2018 does? The IRS teases that “in some cases” filing an injured spouse form with your 2018 return is enough… but what cases are those? Is it where the IRS relied on the 2018 return information for the EIP? That would be my educated guess, but it would be nice not to have to peer into the crystal ball on this issue.

Note also that the IRS is still seriously backlogged processing 2019 paper returns. The Great State of Minnesota’s congressional delegation has uniformly voiced its concern to the IRS on that matter (see letter here), but there is still work to be done. My bet is that if you filed your 2019 paper return with an injured spouse form you slip from tier one to tier two…

Tier Two of Injured Spouse Relief – You’ve Told the IRS You’re an Injured Spouse, but Your Voice is Echoing in the Distance

Tier two is anyone with an injured spouse form currently nestled among the (literally) millions of other documents the IRS needs to open and process. The IRS news release doesn’t actually make any reference to these standalone injured spouse relief forms. Instead the IRS breaks taxpayers into just two camps: those that submitted an injured spouse form with their return and those that didn’t file an injured spouse form at all. But I think that oversimplifies, because a lot of people may have submitted an injured spouse form either by paper with their yet-to-be-processed 2018/19 returns or as a “standalone” paper form after filing a return. I would not place those individuals in the first tier. They are in the “wait a bit longer” group.

There is no special processing center for a standalone injured spouse form: generally, it goes to the same place you would send your tax return. Because of this I have no idea how the IRS would be able to ferret these injured spouse forms from the other papers clogging their arteries to bump the individuals up to tier one. For present purposes, I’d say that filing an as-yet-unprocessed injured spouse form is the equivalent of not filing one at all in the dichotomy that the IRS provides.

The news release somewhat coyly mentions that the IRS doesn’t have a timeframe for responding to these, but will issue checks “at a later date.” One would hope those payments would go out before December 31, 2020, but I don’t actually think there is a statutory imperative for the IRS to apply these payments at any given time. Really just more of a publicity imperative. Fortunately, the IRS news release gives me reason to believe that the IRS is taking this seriously and moving forward with solutions. I believe this because of tier three…

Tier Three of Injured Spouse Relief – You Haven’t Told the IRS Anything, But They Still Hear You

Here is where things get interesting. The IRS says that if you haven’t filed an injured spouse form at all but had your money go to a spouse’s unpaid child support obligations you still don’t need to take any action. How is this possible? Here is where I think we can read between the lines of how the IRS is really dealing with this issue. The only way I can possibly make sense of this is if the IRS is automatically combing its records for ALL joint-taxpayers that had EIP sent to child support agencies and/or all accounts where only one spouse has a certified debt to a child support agency. If people can think of other ways the IRS might already know who is affected without an injured spouse form on file, I’m all ears.

In other words, forget everything I said about three tiers (apologies for wasting your time). The IRS seems to just be looking at its databases and pulling two bits of information from joint returns: (1) injured spouse indicator on file and (2) payments sent to child support with only one taxpayer certified liable. Arguably, dataset two is everything that would be needed, but it also seems that (for whatever reason) those that have the injured spouse indicator on file make for an easier fix. Thus, they fit into the early-to-mid-September payment group. I am not an expert on how the IRS recoups the payments already issued to child support agencies (and very much welcome comments from anyone that has familiarity with the process), but that could also factor into why the injured spouse indicator may matter.

It appears that the IRS is taking a systemic approach to this, while recognizing the unique limitations of the pandemic on just applying manpower to processing all the paper injured spouse forms that have piled up to them. Kudos to the IRS for their problem solving, if that is the case, and especially if they are able to pull this off without requiring those affected to take additional action or send additional mail.

The IRS news release was very short and fairly sparse on details. Many questions and issues remain with the EIP more broadly, but some lessons hopefully can be gleaned in the interim. An overarching lesson may be that the “one-and-done” goal of the IRS to issue a single payment and then sort things out in the 2021 filing season is not feasible (see Nina Olson’s post here). Even strictly on the issue of injured spouse payments, it isn’t immediately clear that an IRS fix won’t need tweaking for many individuals. For example, where the EIP involves an extra $500 for dependents, and especially in the absence of an injured spouse form “allocating” dependents among joint taxpayers, it is not immediately clear how the IRS will decide to split the $500 that was offset to child support. My assumption is that the IRS will read IRC § 6428(e)(2) to mean that you just split the entire EIP down the middle for joint returns, which I think is a completely defensible (though not necessarily required) reading of the statute. 

In any event, one hopes that the IRS implement the fix with a heavy dose of urgency: as the comments sections on Procedurally Taxing amply attest, there are a lot of people hurting for these checks.

Filed Under: Injured Spouse

Scheduled Relief for Injured Spouses Whose Stimulus Payments Were Sent Elsewhere for Past Due Child Support

August 13, 2020 by 14 Comments

When the IRS hastily set up the program for making the stimulus payments authorized by the CARES Act, it did not carefully program its computers to distinguish the cases in which one spouse on a joint return claimed injured spouse status.  If you are not familiar with injured spouse status, find an explanation here.

Given the haste with which the IRS worked to accomplish the task it was given, this oversight is understandable, but it has created a lot of pain among those whose stimulus payments were diverted to pay past due child support of their current spouse.  As a reminder past due child support was the only liability for which the stimulus payments were offset.  We have written about this issue previously here, here and here.  We have received more comments on this issue than any issue on which we have blogged.

In a blog post on Monday, August 10, the National Taxpayer Advocate provides a chart of problems with the stimulus payments that the IRS is fixing or is not fixing.  The problem of wrongly diverting the stimulus payments of injured spouses is one that the IRS is working to fix.  The chart provided by the NTA indicates that the IRS anticipates fixing this problem by the end of August and getting the wrongly diverted checks to these individuals by that time.  It also indicates that individuals who have not received their checks by that point can come into TAS for assistance.

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There is still a distinction between individuals who filed the injured spouse form with their return and those who did not.  Many individuals who know that their spouse has an outstanding liability such as child support or a student loan that will cause the offset of their refund year after year, routinely file the injured spouse form with the return so that the refund due to the non-liable spouse will flow through unimpeded by the offset provisions.  In normal circumstances the filing of the injured spouse form with the return keeps the offset from occurring.  Here it did not and that’s what the IRS is working to fix.  For individuals who did not file the injured spouse form with the return perhaps because this is the first year of the joint return, they do not claim a refund or for some other reason, it will be necessary for those individuals to file the injured spouse form in order to obtain the release of their stimulus payment.

TAS has not been accepting cases involving many of the problems created by stimulus payments because it viewed that it had no ability to assist taxpayers with many of those problems.  On an individual case level, there was little or nothing it could do to fix their problems if the IRS had not developed a fix.  On a systemic basis, it could have filed a broader taxpayer directive.  Whether such an act would have sped up the fixing of the problems is unknown.  The chart shows the cases on which the IRS is creating fixes, the time frames and the cases TAS will now accept.  As mentioned above, it also shows the cases that the IRS is not fixing and that TAS will not accept.  Some of those cases are the subject of litigation that we are covering with other post.  Some of those cases are not mentioned in the chart such as the cases of deceased individuals and prisoners.

The chart is helpful both in providing timeframes and in setting a marker for the fixes the IRS is not undertaking.  It’s wonderful that the NTA is giving out this information and providing it in an easy to digest format.  The IRS might consider doing the same in a prominent place on its website since not everyone receives the NTA blog posts.

Filed Under: Disaster, Injured Spouse

Injured Spouse and EIP: Continued and Increasingly Troublesome Issues

June 16, 2020 by 33 Comments

When the CARES Act was first passed there was a flurry of activity in the tax practitioner community focusing on what potential issues might arise in the IRS’s administration of the Economic Impact Payment (EIP) and the authorizing statute itself. As the EIPs have been disbursed, the focus has shifted from “potential” to “actual” issues. To date, the biggest actual issue I’ve seen has been the offset of EIP to child support where one spouse is not liable for that child support. It is the prototypical “injured spouse” case, but where that remedy has been unavailing.

The magnitude of that issue (in terms of how many people it has negatively affected) has put it on the IRS’s radar. The IRS specifically acknowledges that issue in their FAQs, as covered by Keith here. That post, as well as my own previous post on the issue now have accumulated over 200 comments. If you have not had a client with this problem or otherwise known someone who experienced this problem, you might take a moment to read a few of the many comments in order to obtain the human perspective of the impact of this injured spouse issue. From what I can tell, the IRS has not yet fixed the problem for those it is trying to. Furthermore, the fix proposed wouldn’t help a huge class of taxpayers -those that didn’t file Form 8379 with their 2018/19 return. There is a serious concern that injured spouses may end up with fewer actual dollars in their pockets if the IRS delays too long.

Action is needed, and quick (at the absolute latest before December 31, 2020). This post outlines why I think this sense of urgency is required from a legal, if not humanitarian, sense.

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Something law students learn in Federal Tax I is the concept of “time-value” of money. $1 today is worth more than $1 a year from now. In real life, this truth takes on less-than-trivial meaning mostly when the $1 has a bunch of zeros added behind it. For EIPs there are not enough zeros behind the $1 for time-value to be a huge concern. And so, when I speak of the fewer actual dollars going to injured spouses that have to wait until filing 2020 returns, I am not speaking from a time-value perspective.

Similarly, though more pressing, I am also not speaking of the very real “opportunity costs” of delayed receipt. People that need the money now may have to choose between foregoing necessary purchases or going into debt to fund them. For the clients I work with it is almost always these concerns that are what really matter -not the amount of interest you could earn if you had the money now, but the amount of interest you may have to pay without it.

But since I am not an economist and this is a tax procedure blog, it is the procedural issues that I will focus on. And from a tax procedure perspective I believe there is a real concern that the “advanced” EIP may be worth more to many injured spouses than the EIP claimed on a 2020 return in terms of actual dollars in the taxpayer’s pocket.

Imagine essentially identical individuals, each entitled to a $1,200 credit. One gets their $1,200 EIP this July. The other has their $1,200 credit intercepted to go towards their spouse’s child support obligation. This latter individual (the prototypical “injured spouse”) has to wait until filing their 2020 return (with Form 8379) to hope to receive the money in their pocket. Apart from the wait, this injured spouse may end up with fewer actual dollars sent to them. Why might this be?

Put simply, it might be the case if the injured spouse has a tax liability on their 2020 return that eats into the EIP (obviously they had no such 2020 tax liability when receiving the advanced EIP before the close of the taxable year). Arguably (though I think likely), the EIP is not “protected” against tax as shown on the return claiming it. IRC 6428(b) describes the “treatment” of the credit. The cross-cites of that statute boil down to “treat this like any other refundable credit.” In a nutshell, the way a refundable credit works is to first reduce tax, and then pay out (“refund”) whatever is left over. The critical part is that a refundable credit first goes towards reducing the tax on the return. If there is more refundable credit than tax, there is an “overpayment” (see IRC 6401) that the Treasury issues as a refund… (generally) subject to offset against certain other debts (see IRC 6402).

So if I’m due an EIP of $1200 on my 2020 tax return because I didn’t receive any “advanced portion,” but I have tax of $1000 on that return, I will get a check for $200 -subject (potentially) to offset. Yes, I got the full “value” of the $1200 EIP, but I didn’t get all $1200 in my pocket the same way I would have if I received the “advanced” credit.

(Note that if the EIP were not applied to tax as shown on a return the IRS would be in the extremely awkward position of issuing a refund (the EIP) to 2020 filers that actually owe on the return. I don’t think this is required by statute, though I do think Sec. 2201(d) will create a whole other set of headaches for the IRS in the 2021 filing season pertaining to offsets… more on that later.)

Problems With My Reasoning

But wait! Why does the injured spouse in this example need to wait until filing their 2020 return to get the credit? Why can’t they file Form 8379 as a standalone now? In fact, perhaps it would be completely incorrect to file Form 8379 with the 2020 return because their 2020 return would show an EIP due of $0 -they (arguably) “received” their full credit, which would then reduce it to $0 on the return (see IRC 6428(e)(1)).

That may be correct. But, at present, it might not resolve the issue for two reasons: one legal, one administrative. Let’s begin with rehashing the administrative issue, which will play into the legal issue.

The administrative issue is that unless it was submitted with your 2018 or 2019 e-filed return, you cannot submit a standalone Form 8379 electronically to the IRS. And right now paper is piling up at the IRS processing centers. Further, there are serious questions about how to even properly fill out Form 8379 for your advanced EIP. If you were to file your 2019 return electronically, can you include Form 8379 with it for a credit that doesn’t exist on a 2019 return?

Right now the IRS appears to be using the fact that a Form 8379 was filed at all on a 2018/19 return as a “marker” for assisting these injured spouses with their advanced EIPs. As mentioned previously, progress on that front appears to be slow. But even assuming the IRS fixes that issue soon, the problem remains for any of the following: (1) those that already filed 2018/19 taxes without Form 8379, and (2) those that haven’t filed 2018/19 taxes yet, but that would only be eligible for Form 8379 based on the advanced EIP. For example, if you owe on your 2018/19 return, or if all credits/refund is attributable to the liable spouse, will the IRS system (or tax preparation software) process or even allow you to file Form 8379 electronically? I haven’t tried, but I have my doubts that a 2019 return showing a balance due could electronically submit Form 8379 for the advanced EIP that (apparently) goes nowhere on the 2019 return itself.  

(As an aside, I am also of the opinion that the “advanced” EIP should be treated as a 2018 or 2019 credit based on the clear language of IRC 6428(f)(1) and (2). That would arguably allow a 2018 or 2019 return to include the credit on Form 8379, but creates a whole other set of problems as discussed by Bob Probasco here. Nevertheless, I recognize that I remain in the minority on that view.)

In any event, administratively, I have serious doubts that either standalone Form 8379s or those filed with 2018/19 returns will be processed or otherwise resolved any time soon. And that leads to the legal issue. Because of the statutory language failing to issue the “advanced” EIP by 12/31/2020 may carry legal consequences.

IRC 6428(f)(3)(B) specifically provides that “No refund or credit shall be made or allowed under this subsection [i.e. the advanced credit] after December 31, 2020.” Perhaps there is a workaround to this. One may argue the refund/credit for injured spouses already was made or allowed prior to 12/31/2020. Now, with the injured spouse request, the IRS is simply trying to route the EIP to the right location, which doesn’t run afoul of the 12/31/2020 prohibition. As straightforward as that interpretation may be, it isn’t a slam dunk, and history gives some reason to be wary. In 2008 the IRS scrambled to process injured spouse forms before December from concerns that they were legally barred from issuing the credit after 12/31/2008 based on essentially identical limiting statutory language. The TIGTA report here is instructive, particularly at page 3.

I hope the interpretation that advanced EIPs were already issued and can now be re-routed without issue prevails. Because if it doesn’t then any payment made after 2020 must, by necessity, be the “regular” EIP running headlong into the issues I’ve already outlined (i.e. being reduced by tax shown on the 2020 return, to say nothing of being reduced by the amount of advanced EIP already issued).

The long and short of this is that injured spouse processing is a morass that needs heightened IRS attention. This is true with even greater force if 12/31/2020 becomes a magical “cut-off” point where any movement of money attributable to “advanced” EIP morphs into “regular” EIP, not unlike Cinderella’s stagecoach into a pumpkin.

I have serious concerns that go beyond just the injured spouse issue, and to whether EIPs claimed on 2020 tax returns should be given other “special” status because of the broad language of Sec. 2201(d). But that is a bridge we can cross closer to the 2021 filing season. For now, we know that the injured spouse issue exists and needs attention. I don’t envy the IRS’s predicament in administering this code provision, especially in the midst of a pandemic, “TCJA” changes, and the Taxpayer First Act. But this is real money to real people in real need. It deserves attention.

Filed Under: Disaster, Injured Spouse

Offset of Injured Spouse Stimulus Payment

May 9, 2020 by 233 Comments

On Friday, May 8, the IRS posted Economic Impact Payment FAQ #31 acknowledging that it was aware of the problem that many couples have encountered with the EIP payments.  The FAQ indicates that the IRS is working to fix the problem and taxpayers do not need to do anything to cause the IRS to fix their problem.  That’s good because I am not sure what they can do at the moment.  Caleb Smith wrote a post on this issue that has been the most highly read and commented upon post since it went up.  It is clear from the comments that lots of readers have encountered this problem.  While it is understandable that programming errors would occur when the IRS put together its system so quickly under intense pressure, this issue has created significant financial (and no doubt marital) problems for those impacted.  The FAQ does not indicate when the payments will be undone and checks issued to the injured spouse.  One decision that will not please injured spouses is that EIP dependent amounts will be split between the two spouses rather than paid out in full.  Here’s the FAQ unvarnished by my take on it:

Q31. If I owe tax, or have a Payment agreement with the IRS, or owe other federal or state debts or past-due child support, will my Payment be reduced or offset? (updated May 8, 2020)

A31. No, with one exception. The Payment may have been offset only by past-due child support. The Bureau of the Fiscal Service will send you a notice if an offset occurs.

If you are married filing jointly and you filed an injured spouse claim with your 2019 tax return (or 2018 tax return if you haven’t filed your 2019 tax return), half of the total Payment will be sent to each spouse and your spouse’s Payment will be offset only for past-due child support. There is no need to file another injured spouse claim for the Payment.

The IRS is aware that in some instances a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) has been offset by the non-injured spouse’s past-due child support. The IRS is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve this issue as quickly as possible. If you filed an injured spouse claim with your return and are impacted by this issue, you do not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved. We apologize for any inconvenience this may have caused.

Filed Under: Injured Spouse

Injured Spouse and Economic Impact Payments

April 14, 2020 by 210 Comments

As more and more people receive their Economic Impact Payments (EIPs) over the next few weeks, the number of previously unforeseen issues with EIPs will surely rise commensurately. One that recently was brought to my attention is the issue of offsetting a joint EIP for back-child support when only one spouse actually owes the debt (recall that child support is arguably (see Bob Probasco’s post here) the only offset that can occur with EIPs).

For a normal tax refund being issued under normal circumstances, this unfairness would be solved by filing Form 8379 -Injured Spouse Allocation. But it goes without saying that EIPs are not normal refunds being issued under normal circumstances. Assuming injured spouse allocation is still the mechanism to use, two complicating factors come immediately to my mind: (1) when/how to fill out and submit the the Form 8379, and (2) how quickly one could anticipate any such form actually being processed by the IRS at this point. My thoughts (aided by the input of others) below.

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The case that was brought to my attention involved a joint 2019 tax return with two qualifying children (under 17). Since the taxpayers were under the AGI thresholds the EIP was $3400. All of this money went (I believe) to the husband’s back-due child support. The wife got nothing, though she owed no debts subject to offset. When they went to the county to ask for the portion of the refund attributable to her the county said, “file Injured Spouse Relief with the IRS.” And that’s where things stand.

Obviously the whole point of the EIP is to get money in pockets as quickly as possible. So filing an injured spouse form after the fact (and especially with IRS staffing issues) is concerning. But can you file an anticipatory injured spouse claim for your EIP? Highly doubtful, both as a matter of practicality (most checks are being sent imminently so it would be hard to send the Form 8379 first) and of mechanics (should you send the Form 8379 with your tax return and how would you fill it out so that it is properly processed?)

Very interestingly, the taxpayers I referenced above DID file a Form 8379 with their 2019 tax return but obviously not in anticipation of the EIP (since that couldn’t be on the return to begin with). And still the EIP was offset. Accordingly, I don’t see much in the way of proactive measures taxpayers or practitioners can take to avoid this outcome with present IRS practices. Short of filing separate returns, which is useless if you’ve already filed joint (and wouldn’t reasonably be fixed by filing a superseding return, since that return would need to be filed by paper), there doesn’t appear to be anything you can do. This calls for a systemic fix.

Until and unless that systemic fix is made, however, we are stuck reacting to the offsets. And how should practitioners react? Two ideas come to mind, and I’d ask the community to weigh in.

The first is to simply follow the advice of the county and to file Form 8379. Still, issues abound with how to actually fill it out -particularly since the first question on that form is “what year does this pertain to” and the last seven questions ask for tax data from that year. If the year is 2020, you have no tax data because it is an open year. I suppose you could just put “0” for everything except the “credits” (line 17) or “payments” (line 20) section, where you’d put in the full EIP. I question whether the IRS would process such an request.


My initial thought is that it should be listed as tax year 2019 (or 2018, if you didn’t file 2019) since the language of the ADVANCED credit specifically provides “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against the tax imposed by chapter 1 for such taxable year in an amount equal to the advance refund amount for such taxable year.” IRC 6428(f)(1) [emphasis added]. But most in the tax community (with a notable exception or two) have disagreed with me, taking the position that 2018/2019 are really just used for calculating the advanced credit.

I still have my reservations based on the statutory language, but I will concede the point for other reasons… Namely that my local taxpayer advocate has informed me that the EIP posts in the IRS records as a 2020 tax module payment (i.e. on the 2020 account). That says to me “treat it as a 2020 tax return item.” Right now we are living in the IRS’s world and are just trying to expeditiously get payments to those in need: whatever the IRS computers say is so, I’ll agree with if it speeds things up. At least until this is over, at which point I’ll probably litigate if I think it is wrong and is hurting my client.

My second (and parting) thought on the subject is one that I would definitely appreciate input on: whether one could work with the county that takes the payment, rather than the IRS. Again, absent a systemic fix I have serious doubts about how quickly the IRS can resolve this even if they give guidance on how to fill out Form 8379. I think the county taking the payment could be much more responsive, though I pretty much never work with counties on child support issues, and have no idea what constraints they face. Those that do, I’d appreciate input: is there a way to convince the counties that these payments are “special,” and that half should go to the non-liable party? Or is the IRS the only voice that can say that? Is it too late because the payment is disbursed to the child support recipient, and the county would have to claw it back? So much that I am presently ignorant of…

Looking forward to the thoughts on the matter. And many thanks to the tax community for how responsive they have been on so many of these issues already.

Filed Under: Disaster, Injured Spouse

Seeking a Federal Tax Refund via Habeas Corpus – Reminder of the Injured Spouse Remedy

March 21, 2019 by 1 Comment

In the recent case of Turner v. United States, (N.D. Cal. 2019) a prisoner sought to obtain a refund of money for his wife using the remedy of habeas corpus. Mr. Turner’s effort to obtain the refund through this process failed but in his predictable failure a few points can be made about the process. The main point that jumped out from the case concerns the issue of injured spouse relief. In reading the case I did not get the impression that the judge was aware of injured spouse relief. This makes sense because the judge is a district court judge. It also did not appear that the DOJ Tax Division attorney mentioned it though any mention may have been made informally. In case we have any readers who are unaware of injured spouse relief, I thought I would briefly review the grounds for this relief since this is the time of year when such relief is most important. We have written about it before here and here.

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Mr. Turner was sent to prison almost two decades ago as a result of a conviction for first degree murder. While in prison he apparently met and married Regina in 2017. She filed a return for that year claiming him as a dependent. The facts as presented in the opinion state that she did not file a joint return although on the facts that would have been the correct filing status and that would have made what happened next easier to understand.

When Mrs. Turner filed her 2017 return, she apparently claimed a large refund which Mr. Turner alleges that the IRS took to satisfy Mr. Turner’s outstanding federal tax liability. I would not expect someone in prison for murder for 20 years to have an outstanding federal tax liability. It is possible that he had another type of liability that comes within the offset provisions and it is also possible that he totally misconstrued the reason the IRS hung onto her refund. Aside from the puzzling aspect of someone in prison so long having a liability, there is the issue that this was not a joint return raising the question of what would have triggered the offset to his outstanding debt.

The court took very little time disposing of the case because habeas corpus relief does not extend to tax refunds. Because it’s so clear that relief could not be granted on the basis requested, I think the court did very little to flush out the correct facts and perhaps untangle the situation for a confused petitioner.

Still, the case can provide a basis for discussing the injured spouse provisions which often confuse taxpayers and occasionally confuse practitioners. Perhaps the best way to avoid injured spouse issues is to carefully vet any prospective marital partner to ascertain what debts the partner brings into the marriage. A partner coming into the marriage with tax debts, student loan debts, outstanding child support or any of the types of debts that trigger offset is a partner for whom the taxpayer must be very careful when filing the tax return. Filing a joint return with someone who owes a type of debt subject to offset means that any refund on the return will be taken and applied to the outstanding debt unless the parties affirmatively alert the IRS that it should not.

The injured spouse provisions often get confused with the innocent spouse provisions of IRC 6015. In an innocent spouse case a married couple has filed a joint return on which they owe more money either as a result of an additional assessment or an underpayment. One of the spouses (sometimes both) seek to limit their exposure to the liability for the reasons provided in IRC 6015. In contrast the injured spouse provisions arise when a married couple files a joint return on which they report a refund due to them. The IRS takes all or part of the refund to satisfy the outstanding debt of one of the spouses, the liable spouse. The non-liable spouse is injured because all or part of the refund results from their payment and the non-liable spouse seeks a return of the portion of the refund attributable to him or her. Unlike the innocent spouse provisions, the injured spouse provisions are a creature of administrative practice and not the statute.

If the refund on the joint return results wholly or partially because of the spouse who does not owe a debt to the government, the spouse who does not owe the debt should file a Form 8379 with the tax return. This means filing the return by paper and waiting a long period for the refund. The extra delay will be worth it if the form prevents the IRS from offsetting the refund of the non-liable spouse. Some taxpayers will not know about the Form 8379 or will not know that they spouse has an outstanding liability. So, the IRS will make the offset and send them a notice of what was done. For the non-liable spouse in this situation whose refund has been partially or wholly taken to satisfy the separate liability of their spouse, the possibility of the return of the money still exists. In this situation the injured spouse should file the Form 8379 after learning of the taking of the refund. The IRS will require the injured spouse to provide the portion of the refund attributable to that spouse. Assuming that the injured spouse can successfully prove to the IRS that all or part of the offset refund was generated by the party with no liability, the IRS will release the appropriate refund to the injured spouse and increase the debt owed by other spouse.

Because the process of requesting injured spouse relief is a bit cumbersome, some spouses take the tack that the safest path with a spouse who owes outstanding debts is a married filing separate return. Using the injured spouse provision, the non-liable spouse can obtain the benefit of the joint return rates while still getting back the refund resulting from their efforts. Of course, if the existence of the other spouse’s debt has caused them to lose confidence in their spouse, opting for a married filing separate return may be best for other reasons.

It’s not clear to me if Ms. Turner has the ability to seek a return of her refund based on the injured spouse provisions but based on the arguments made by her husband she should at least look into the injured spouse provisions to determine if they would form the basis for relief.

 

Filed Under: Injured Spouse

Innocent Spouse Injured by Using the Wrong Form

March 28, 2017 by 1 Comment

The difference between innocent and injured spouse can create confusion.  That confusion gets illustrated in the case of Palomares v. Commissioner, T.C. Memo 2014-243 which will soon be argued before the 9th Circuit by a student at the tax clinic at Gonzaga Law School.  The case illustrates something that regularly happens in innocent spouse case – the innocent spouse’s refunds get offset by the IRS to satisfy the liability of the “liable” spouse – and getting them back can prove very difficult for the innocent spouse.

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For anyone unfamiliar with the innocent spouse and injured spouse provisions, I will briefly discuss the distinction between the two types of relief.  Innocent spouse relief allows a spouse who has filed a joint return to obtain relief from the joint and several liability that results from filing a joint return if the spouse requesting relief meets certain criteria set out in IRC 6015(b), (c) or (f).  Injured spouse relief allows a spouse who files a joint return to recover the portion of the refund resulting from that return which relates to the liability of the requesting spouse when the refund would otherwise go to satisfy a tax, or other liability subject to offset, owed solely by the other spouse.  While both forms of relief result from filing a joint return, the goal of each type of relief differs and the difference can create confusion for someone who does not regularly handle these types of cases.

Ms. Palomares got confused.  She needed innocent spouse relief but filed Form 8379 designed for use by injured spouses.  The IRS recognized her confusion and provided her with the correct form, Form 8857.  Upon receipt of the correct form, Ms. Palomares eventually filed it but the delay creates the issue in the case.  The IRS determined she deserved some relief as an innocent spouse; however, the delay in filing the correct form limited that relief.  After incurring the joint liability for which she sought innocent spouse relief, Ms. Palomares found that the IRS took the refunds she claimed in subsequent years in order to satisfy the unpaid liability on the joint return.  In seeking innocent spouse relief, she also wanted a return of the refunds the IRS had offset against the joint liability.  The issue here turns on the timing of her request for refund, which turns on whether the filing of the incorrect form nominally seeking injured spouse relief can meet the requirements of the informal claim doctrine allowing her request for relief to relate to the date of filing the injured spouse relief rather than the date of filing the correct form for innocent spouse relief.

In addition to the general confusion that exists between innocent and injured spouse relief, Ms. Palomares had the additional handicap that English was not her first language, and she spoke very little English.  The years at issue for the refund are 2005 through 2008.  By these years, she had separated from her husband, and she filed returns using the filing status of head of household.  As mentioned above, the IRS took the refunds reflected on these returns as it should using the power of offset granted in IRC 6502.  When she did not receive her refunds for 2006 and 2007, she sought assistance from the Northwest Justice legal clinic which helped her fill out the wrong form on July 1, 2008.  This clinic is not a low income taxpayer clinic but a clinic providing general legal assistance.  On September 24, 2008, the IRS sent her a letter with the correct form.  The Court found that “She did not call or otherwise contact respondent with respect to the September 24 letter.”

Ms. Palomares’s life intervened and kept her from focusing on her taxes for almost two years.  Finally, in August, 2010, she filed the Form 8857 seeking innocent spouse relief with the correct form and seeking a return of the refunds taken from her for four years.  Initially, the IRS took the position that the request came too late because she sent it more than two years after collection activity had begun; however, on May 14, 2012 the IRS reversed its position regarding the two year rule and requests for relief under IRC 6015(f).  The IRS granted her relief as an innocent spouse; however, it limited her refund to amounts paid within two years of the filing of the Form 8857 in 2010.  She appealed arguing that the relief should date from the submission of Form 8379 and that is the issue before the court in this case.

The Tax Court found that the Form 8379 did not meet the requirements for an informal claim.  The requirements for an informal claim do not come from a statute since this is an equitable remedy constructed by the courts to prevent an injustice.  As the Court notes, the sufficiency of an informal claim largely turns on the facts; however, courts generally look for certain markers in deciding whether to treat something other than a formal claim for refund as an adequate informal one.  The underlying principle concerns exhaustion of administrative remedy and whether the IRS had a chance to consider the request.  The more the taxpayer can show that the inappropriate document filed essentially apprised the IRS of what it needed to know in order to grant a refund, the more likely the taxpayer will succeed.

The Court states that a qualifying informal claim must satisfy three requirements.  It quoted from a non-precedential memo opinion to set out the requirements:

It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations applicable to refunds if (1) the writing is delivered to the Service before the expiration of the applicable period of limitations, (2) the writing in conjunction with its surrounding circumstances adequately notifies the Service that the taxpayer is claiming a refund and the basis therefor, and (3) either the Service waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the Service rejects the informal refund claim. Jackson v. Commissioner, T.C. Memo 2002-44, slip op. at 10.

The Court found that the Form 8379 meet the first test citing to Kaffenberger v. United States, 314 F.3d 944 (8th Cir. 2003).  The Court found that the Form 8379 did not convey sufficient information to notify the IRS that Ms. Palomares sought relief from the liability created by the joint return with her then husband and sought a refund of amounts applied to the liability created by the joint return.  The Court determined that sending her the form for innocent spouse relief amounted to guess by the IRS that she might have intended to request that relief rather than an awareness that she wanted such relief.  The Form 8379 did not reference 1996, the year for which she wanted innocent spouse relief.  Because it did not reference that year, the IRS lacked sufficient clues to know exactly what she wanted and to make a determination based on her Form 8379 other than that the form she sent did not work for the circumstances of her situation since she had not filed a joint return in the years to which the form related.  So, the Court denied her claim for refund based on the date of filing the Form 8379.

Ms. Palomares presents sympathetic facts.  She clearly did not know the difference between innocent spouse and injured spouse, and neither did the clinic that assisted her with her divorce and that helped her file the wrong form.  The IRS gave her the correct form relatively quickly but she delayed filing that form because of things happening in her personal life.  She appears to deserve the refunds she seeks.    The case deserves watching as it heads into argument in the 9th Circuit because of the effort to expand the informal claim doctrine into an area of some confustion.  If the IRS loses, it will probably do so because it was nice and sent her the innocent spouse form.  The outcome turns on whether the IRS knew what she wanted to a degree that would have allowed it to make an innocent spouse determination at the time it received the injured spouse form or instead made an educated guess based on the unavailability of the relief requested on the form she submitted and the confusion surrounding these two similar but different forms of relief available to spouses.

Filed Under: Injured Spouse, Innocent Spouse, refund claim

Update on Splitting Refunds in Bankruptcy Cases

January 25, 2017 by 1 Comment

In May of 2014, I wrote a post describing the way that bankruptcy courts approach splitting refunds in the circumstance in which one spouse goes into bankruptcy the other does not and then the couple files a joint return which generates a refund.  That post has, in a surprise to me, been one of the most popular posts in terms of the number of people who have accessed it.  Last month, another bankruptcy court opined on the issue while coming at the issue from a slightly different position than in the case from the prior post.  The recent case gives me a chance to update the post and describe bankruptcy procedure regarding the automatic stay, but also to bring up the filing season issue of injured spouse.

I recently wrote on the filing season issue of superseding returns.  I hope to write soon on another filing season issue updating another popular prior post regarding offset bypass refunds.

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As a prelude to the discussion of the problem of splitting refunds in bankruptcy cases, a quick reminder of injured spouse rules will assist those facing the situation as filing season approaches.  I wrote about the injured spouse provisions in September of 2016 in the context of discussing the statute of limitations for making an injured spouse request.  In that post I noted that if a taxpayer knows at the time of filing a joint return that their spouse owes the IRS but the taxpayer does not owe the IRS, the IRS has created a form to file with the return to alert the IRS to the desire of the spouse with no liability to have their portion of the refund actually refunded rather than offset:

When someone believes they qualify for injured spouse status, they should attach a Form 8379 to their tax return. Of course, a spouse may not know that their partner has a debt which will cause an offset of refund on the joint return and may not know that they should proactively file the Form 8379 to avoid the problem.

Unlike the innocent spouse provisions which apply when the IRS determines an additional liability on a joint return, the injured spouse provisions apply when one of the spouses already owes the IRS a liability.  When a couple knows that one partner owes the IRS a liability (or any other liability subject to the 6402 offset provisions such as student loans, child custody, state tax, etc) and the couple desires to file a joint return nonetheless, usually because of the tax benefit of joint return status, then the couple should attach the Form 8379 to the return.  If the spouse who does not owe the IRS (or the other offset entities) had no knowledge of their spouse’s debt to the IRS (or the other offset entities) at the time of filing the joint return, then he or she can file the Form 8379 when they learn of the problem which will generally occur not too long after the filing of the return because of the failure to receive the anticipated refund.  The outside time period for making the request, is discussed in the prior post.

While the IRS has issued rulings and a form making the path to injured spouse relief from the IRS relatively straightforward, the path takes on a different form if the fight over the refund occurs outside of the IRS.  Outside of the IRS, the fight over the refund usually takes place in a bankruptcy court or a domestic relations court.  The IRS rules regarding the splitting of the refund do not bind these courts but do provide context for deciding how to do so.

In the recent case of In re Nevins No. 15-10003 (Bankr. N.H. December 23, 2016), the application of the rules came up in a fight between the debtor and the IRS, rather than the debtor and the debtor’s spouse or the debtor and the bankruptcy trustee, in the context of a potential violation of the automatic stay.  Mr. Nevins filed a voluntary chapter 13 petition on January 4, 2015.  The court confirmed his plan on March 18, 2015, a normal time period between filing and confirmation of the plan.  The plan provided for payment of the IRS claim under terms that varied depending on the different types of claims held by the IRS.  In a twist on the injured spouse situation, Mrs. Nevins, who did not join her husband in filing bankruptcy, did also owe the taxes.  So, the Nevins case does not involve an injured spouse claim although the analysis applied here could also apply in an injured spouse context.

Married couples can make an election when filing bankruptcy to file a joint bankruptcy or to have just one spouse file bankruptcy.  Like the tax code, the bankruptcy code does not dictate the filing of a joint bankruptcy petition just because of marriage.  If one spouse files bankruptcy, the automatic stay of bankruptcy code section 362 applies to that spouse but not necessarily to the other spouse.  Bankruptcy code section 1301 does create a stay that can cover the non-filing spouse in chapter 13 cases; however, this stay only applies to consumer debts and the definition of consumer debt does not include taxes.

So, when Mr. Nevins filed bankruptcy and Mrs. Nevins did not, she remained exposed to the full panoply of collection weapons available to the IRS while he fell under the shield of the bankruptcy code.  In this case, the issue of offset involves not only the shield of the bankruptcy code but also the ultimate impact of discharge.  Most of the liabilities owed by Mr. Nevins fell into the general unsecured claim category.  He owed slightly over $40,000 but the IRS claim and the chapter 13 plan classified about $32,000 of that debt as general unsecured debt.  General unsecured debt is the worst type of debt a creditor can hold.  In Mr. Nevins’ plan he proposed to pay about 2% this debt.  This means that over the five year life of his plan he would pay the IRS about $640.00 and the balance of the debt would go away upon completion of the plan together with all of the interest and penalties on the debt.  For Mrs. Nevins, however, the full amount of the debt continued to exist and continued to accrue interest and, possibly, penalties.

This situation provides the IRS with an incentive to take the joint refund and apply it to Mrs. Nevins’ debt.  The automatic stay prevented the IRS from applying it to his debt since it must take payment through the plan on his debt.  The IRS calculated how much of the $1,293.00 refund each party should receive.  It determined that using its formula for allocation of refunds Mrs. Nevins should receive the entire refund and so it offset the entire refund in partial settlement of her debt.  By doing so, it collected in one action more than his five year plan would pay on this debt.  Mr. Nevins objected, arguing that the offset of the refund violated the automatic stay because it acted as a taking of property of the estate during the period of the stay.  The IRS countered that its actions did not violate the stay since none of the refund belonged to Mr. Nevins and nothing prevented the IRS from collecting on Mrs. Nevins’ liability.

The bankruptcy court faced a situation in which it needed to decide how it should calculate the refund in order to know if the taking of the refund violated the stay.  After noting the absence of controlling precedent in its jurisdiction, the court went through the same type of analysis the Lee court had done in the case previously blogged.  It also came to the same conclusion.  It rejected the 50/50 rule as too simplistic.  It rejected the income rule because it divides the refund based on “a factor which may have very little to do with actual contributions to the total tax obligations between spouses.”  It similarly rejected the withholding rule for similar reasons, noting that it may apply anyway in cases with no credits.

This led the court to the so-called separate filings rule adopted by the IRS in the revenue procedures.  The court notes that the majority of the courts are falling in line with the separate filings rule as it does.  The court described the rule as follows:

[The Separate Return Rule] allocates the refund based on each spouse’s hypothetical individual tax liability (hypothetical liability) had the spouses filed their tax returns as married parties filing separately. First, each spouse’s contribution to total payments is determined. Second, each spouse’s share of the joint tax liability is calculated based on the ratio of that spouse’s hypothetical liability to the sum of both spouses’ hypothetical liabilities. Each spouse owns that portion of the joint refund equal to the amount by which his or her contribution exceeds his or her share of the joint tax liability.

Because it lacked all of the facts necessary to rule on the precise disposition of the refund, it reserved the ruling on the outcome for another day.  The case caused the bankruptcy court to spend lots of energy over a $1,293 refund but a decision that sets precedent should the issue arise again.  If the IRS correctly calculated the refund based on the separate filings rule, the offset will stand.  If it did not, in whole or in part, some of the refund will come into the estate to satisfy the liability of Mr. Nevins under the plan and the IRS will potentially face damages for violation of the automatic stay.  I suspect any damages here would be small but it is a risk for the IRS anytime it takes money that arguably belongs to a bankruptcy estate.

Filed Under: Bankruptcy, Injured Spouse
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