Significant Changes in New Draft Form 8857

We welcome as her second visit to the blog my colleague in the tax clinic at the Legal Services Center of Harvard Law School, Audrey Patten.  Audrey has developed a significant docket of innocent spouse cases and is currently working with Christine to write the third edition of A Practitioner’s Guide to Innocent Spouse Relief.  Look for their book in the coming year.  She also worked with clinic student Madeleine DeMeules on the oral and written comments to Form 8857 discussed here. As Audrey discusses below, their comments led to some changes to the newly revised form.  With the new emphasis on the administrative record, the request for relief from joint liability takes on a high level of importance from the first submission.  Keith

Submitting Internal Revenue Form 8857 to the IRS is the starting point for seeking administrative relief from joint and several liability under IRC §6015, generally called “innocent spouse relief.” The current version of Form 8857 dates to 2014 and has come under scrutiny for being difficult to understand, especially for pro se taxpayers, and unclear as to what relevant information and documentation a taxpayer should submit. With the Taxpayer First Act’s new requirement in IRC §6015(e)(7) that the Tax Court must limit its review of innocent spouse cases to the administrative record, Form 8857, and its use in eliciting relevant taxpayer information, is now crucial to setting up a strong Tax Court case.

The IRS has released a draft update to Form 8857, with a revision date of June 2021. The new form has several improvements. These include various changes that the Low Income Taxpayer Clinic at Harvard suggested in a written comments submitted to the IRS last year and that have been advocated by other LITCs and the ABA. The draft form’s layout and presentation, however, will still be challenging to many taxpayers, especially those with limited resources, education, or writing skills. Practitioners must therefore continue to be mindful about preparing well-crafted narrative statements for clients that track the equitable relief factors in Rev. Proc. 2013-34 and that synthesize relevant facts and documentation to ensure a complete administrative record.

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Use of Form 8857

For those unfamiliar with innocent spouse practice, the most common pathway to relief begins by sending Form 8857 directly to the IRS unit dedicated to §6015 relief in Covington, KY. The unit consists of examiners and appeals officers trained in handling innocent spouse cases. While there are three types of innocent spouse relief available to taxpayers (located in IRC §6015(b), (c), and (f)) the taxpayer only submits one copy of Form 8857. Form 8857 does not ask taxpayers what type of §6015 relief they are seeking. Rather the IRS uses that one form to automatically review the application for all three types of relief. It is therefore important that taxpayers are able to present a full picture of their circumstances. The best practice is to ensure that the information on the form and accompanying attachments can support the factors used to weigh “equitable relief” under §6015(f) so that the provision can be properly evaluated if the taxpayer is denied (b) or (c) relief. These factors are found in Rev. Proc. 2013-34 §4.03 and allow for the most comprehensive evaluation of the taxpayer’s circumstances.

Major Changes on the June 2021 Draft Form 8857

1. The “Important Things You Should Know” box at the top of the form has added key important provisions to its bullet point list:

           i. It now directs taxpayers to consult Publication 971 “for help in completing this form and for a description of the factors the IRS takes into account in deciding whether to grant innocent spouse relief.” That citation was a specific recommendation the Harvard clinic included in our comments because, without such a reference, Form 8857 leaves taxpayers completely in the dark as to whether a balancing test of factors even exists. Taxpayers unfamiliar with Rev. Proc. 2013-34 may not understand why certain information is being requested on the form and therefore have a harder time interpreting the questions. That being said this addition has its limitations. Publication 971 lists out the equitable relief factors in a section entitled “Equitable Relief,” (in reference to §6015(f) relief) which is separate from the Publication 971 section called “Innocent Spouse Relief” (in reference to §6015(b) relief). Someone unaware that equitable relief is indeed a form of innocent spouse relief to be considered on Form 8857 might be quite confused and potentially skip that section of the Publication 971 altogether.

            ii. Another bullet point is added that notes the new administrative record rule, warning that the Tax Court may only be able to review information the taxpayer, or their spouse, submits or that is in the IRS file. This is also reinforced by yet another new bullet point asking the taxpayer to attach documentation to Form 8857 and by more frequent reminders throughout the form that additional pages can be attached to lengthen written answers.

2. The draft form adopts another of our clinic recommendations by asking the taxpayer to indicate if English is their primary or preferred language. This is a welcome question because, not only does it assist in picturing the overall life situation of the individual tax payer, it also allows for the collection of aggregate data on the languages needs of potential innocent spouses. This will in turn open the possibility to direct resources to identify language groups that may be considered frequently encountered and help develop language access resources for the innocent spouse unit at the IRS.

3. The draft form includes a new check box asking if the taxpayer consents to receiving voicemails from the examiner. This addition will be of great benefit to those taxpayers who may work jobs that do not allow them to readily answer the phone during business hours. Strict adherence to working hours and restrictions on calls are disproportionately a feature of many service industry, manufacturing, caretaker, and manual labor jobs that are held by lower income taxpayers. By allowing flexibility in communications, it is more likely that taxpayers using Form 8857 may be able to stay in contact with the IRS examiner and lead to a successful resolution of their case.

4. The draft form also adopts a change the ABA has suggested for many years. That is the adjustment to ask whether the taxpayer intended to file a joint return as opposed to whether they did sign a joint return. This language adjustment can account for scenarios where someone signed under duress. Conversely, it also covers taxpayers who did not physically sign or file the return but did expect a joint return would be filed.

5. Part III of the Form 8857 deals with taxpayer’s involvement with the couples’ finances. Under the current version, the questions are structured with mandatory check box answer lists for taxpayers to rate their level of knowledge for each question followed by an open-ended direction to explain the checked answer in more detail. This format raised concerns in the past that taxpayers were being required, under pains and penalties of perjury, to check off a rating of knowledge that could not capture any nuance. The new draft form eliminates those check boxes and replaces them with a series of open ended questions. It should be noted however that the new questions are almost paragraph length and the sheer volume of words in the questions may drive away some taxpayers with limited education or writing skills.

Areas of Continued Concern

Like the existing version, the new draft form does not explicitly guide taxpayers through the potential factors that the IRS will consider. It also does not give equal weight to the information it collects. For example, there is only one question devoted to mental or physical health (Question 9). Meanwhile, the draft form devotes at least 8 separate open-ended questions that appear directed at the knowledge factor (Questions 12-19). The unwary taxpayer, who may not realize that all factors are subject to a balancing test, with no one factor automatically weighing more than the others, may be under the impression that the mental or physical health question is of comparatively minimal importance and not devote enough time to thoroughly answering it.

Another example is the one question on the form that seems to speak to the significant benefit factor as well as the knowledge factor (Question 18). Question 18 asks if, during the year at issue, the taxpayer or the non-requesting spouse “incur[red] any large purchases or expenses?” It is followed by Question 19 which asks about transferred assets. But neither of these questions asks the taxpayer to describe whether they actually were able to use, enjoy, or benefit from such purchases, expense, or assets. Practitioners should advise their clients that affirmative answers to those questions can be supplemented with a statement describing whether they actually received a significant benefit.

Part V of the draft form is the section asking about domestic violence and abuse. It has been revised to remove the 10 check boxes that described potential types of abuse and leaves the original open ended question (Question 23b) asking the taxpayer to describe the abuse they experienced. While check boxes to evaluate abuse may seem inappropriate, they do serve an important function on the existing form in that they flag types of behavior that count as abuse, including things that may not seem obvious to a taxpayer unfamiliar with the broad definition of abuse found in Rev. Proc 2013-34. For example, the list includes asking whether the non-requesting spouse did things like “withholding money for food, clothing, or other basic needs,” “criticize, insult or frequently put you down,” or “Abuse alcohol or drugs.”

These descriptive examples of different kinds of abuse are useful because the IRS’ definitions of abuse in Rev. Proc 2013-34 is far more expansive than many state law definitions of abuse that a taxpayer may be more familiar with. The IRS definition is not limited to physical abuse and includes emotional abuse, financial control, and substance abuse. The ten examples in the current version can guide taxpayers as they prepare their open ended answer. The new draft form, however, provides no examples before that question as to what types of scenarios can be considered abuse. Moreover, the open ended question is immediately followed by an invitation to attach documents normally related to physical abuse, such as court documents, medical records, police reports, and injury photos. This set-up easily leaves the impression that only physical abuse is truly relevant. Question 23a, which asks if abuse was present, does have a note in parenthesis that says abuse may be “physical, psychological, sexual, emotion, or financial abuse, and can include the abuser making you afraid to disagree with him or her or causing you to fear for your safety.” However, the note is easily missed. It also leaves out substance abuse. Removing the requirement to check the ten boxes but, still leaving the list of behaviors in place as illustrative examples, would be a better approach.

In sum, while there have been some welcome adjustments to Form 8857, the new draft version will still be quite challenging for the average pro se taxpayer unfamiliar with the factors the IRS weighs in these cases and with the types of documentation needed to bolster their case. Although IRS employees in the innocent spouse unit are able to elicit more information based on answers to the form if they call the taxpayer, that is not a reliable fallback. The new administrative record rule means that if the taxpayer ends up taking the case to Tax Court, it will be their loss if facts did not make it on the record. Practitioners will therefore need to be vigilant about ensuring that narratives are able to track the factors in Rev. Proc. 2013-34 and are supported with clearly labeled documentation. Failure to do so will result in limitations in the ability to present the case in the Tax Court should the IRS not grant administrative relief.

Third Circuit Weighs Individual Facts and Circumstances in Ruling that Taxpayers Had Given the IRS Clear and Concise Notice of a Change of Address

We welcome as a first time blogger my colleague in the tax clinic at the Legal Services Center of Harvard Law School, Audrey Patten.  Audrey was the principle drafter of the brief in the Gregory case.  See my brief prior post on the case here.  Audrey is in her fourth year of working in the tax clinic after previously working in the Predatory Lending Clinic at the Legal Services Center.  She is currently working with Christine to write the third edition of A Practitioner’s Guide to Innocent Spouse Relief.  Look for their book in the coming year.  Keith

On December 30, 2020, the United States Court of Appeals for the Third Circuit ruled in favor of the taxpayers in the case Gregory vs Commissioner (Docket No. 19-2229).  The issue before the Third Circuit was whether the taxpayers’ use of Forms 2848 Power of Attorney and 4868 Request for Extension of Time constituted “clear and concise notice” of a change of address to the IRS pursuant to Treasury Regulation §301.6212-2.  Although filed as a non precedential opinion, the outcome is a clear example of how the IRS cannot simply ignore the actual knowledge it has of a taxpayer’s address when issuing a Statutory Notice of Deficiency pursuant to I.R.C.§6212(b)(1), even if that taxpayer failed to follow the IRS’ prescribed procedures for changing their address.  It also stands for the concept that analysis of what constitutes “clear and concise notice” of a last known address remains a fact specific inquiry in line with prior tax court and circuit court case law on the issue.  From a practitioner’s point of view, the case also serves as a lesson in carefully examining the lower court record for facts that may turn a case, even if those facts were not fleshed out in the lower court opinion.

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The facts of the case are as follow.  Mr. and Mrs. Gregory filed their 2013 income tax return using an address in Jersey City, NJ.   In June 2015, the Gregorys moved to an address in Rutherford, NJ.  They did not fill out a Form 8822 Change of Address nor did they otherwise inform the IRS of their move at that time.  On October 15, 2015, their CPA filed their 2014 return.  The CPA mistakenly put the Jersey City address on the return, even though the couple had moved to Rutherford in June. 

Meanwhile, the IRS began an audit of the 2013 return and in November 2015 the CPA faxed two Forms 2848 Power of Attorney, one for each spouse, to a revenue agent assigned to the Gregorys’ case.  The Forms 2848 both had the correct Rutherford address listed for each taxpayer.  The forms were presumably processed because the revenue agent began communicating about the account with the CPA.   The CPA also testified in the Tax Court that he had verbally communicated to the revenue agent that his clients’ address had changed. Furthermore, in April 2016, the CPA filed a Form 4868 Request for Extension of Time for the Gregorys’ 2015 income tax return.  That form also had the correct Rutherford address and was also presumably processed because the Gregorys were granted their request.  The CPA continued to correspond with the revenue agent about the 2013, and later 2014, audits throughout the spring of 2016.  However, in October 2016, the IRS mailed a Statutory Notice of Deficiency for 2013 and for 2014 to the Gregorys’ old, invalid address in Jersey City. The post office marked the notice “undeliverable” and returned it to the IRS.  The CPA learned of the notice in January 2017 through a call to the Practitioners’ Priority Line and immediately filed a Tax Court petition, which turned out to be several days past the 90 day deadline in the notice of deficiency.

Both the Gregorys and the IRS filed cross motions to dismiss in the Tax Court.  The Gregorys argued that they had never received a valid notice of deficiency to their last known address, as required by I.R.C. §6212.  Meanwhile the IRS claimed that the last known address was in fact the Jersey City address that was written on their 2014 return, making the notice, and its deadline, valid and thus time-barring the Gregorys’ petition.  Under the statute, a notice of deficiency must be sent to the last known address. The term is not further elaborated in the statute, but Treasury Regulation §301.6212(a) defines last known address as the address on the last filed income tax return unless the taxpayer has provided “clear and concise” notice of a change of address. The regulation directs to an open ended line of procedures “subsequently prescribed by the Commissioner” to learn the meaning of clear and concise notice.  The most recent of these revenue procedures, and the one in effect when the Gregorys sent in their Forms 2848 and 4868, was Rev. Proc. 2010-16, which explicitly excludes Forms 2848 and 4868 from acceptable methods of “clear and concise” notice. 

The IRS, in its trial briefing, argued that the treasury regulation, and by extension Rev. Proc. 2010-16, should be given judicial deference and disqualify the Gregorys’ use of these forms to give clear and concise notice.  While declining to state that it was bound by Rev. Proc. 2010-16, the Tax Court found that the instructions to Forms 2848 and 4868, which state that those forms shall not be used for change of address purposes, made it reasonable for the IRS to assume that the Gregorys’ last known address was the one present on their last filed tax return.  The Court made no mention of the CPA’s testimony that he had also directly told the revenue agent by phone that the Gregorys had moved.

In their appeal, the Gregorys first argued that, because Forms 2848 and 4868 ask for a taxpayer’s address, it is reasonable to assume the IRS will process that information, especially given the government’s integrated computing systems.  However, even if the Court were to find that those forms were not clear and concise notice as a matter of law, the Gregorys argued that it should analyze the specific facts and circumstances of their case to evaluate whether the IRS actually had notice of the Gregorys’ address and not give any deference to the strict rules of either the form instructions or the revenue procedure.  Their briefs argued that the clear trajectory of both tax court and circuit court case law favored an expansive reading of last known address. This is because of the serious consequences to the taxpayer should they not receive their notice of deficiency and thus lose their chance to enter the Tax Court.

The Third Circuit has followed this expansive reading.  While declining to rule that Forms 2848 and 4868 are clear and concise notice of a change of address as a matter of law, it did find that the proper inquiry into clear and concise notice was what the IRS knew, or should have known, at the time it sent out the notice of deficiency.  Per the opinion:

“…courts have required the IRS to use “reasonable diligence” to determine a taxpayer’s last known address.  This reasonable diligence requirement “is rooted in equity.”   Reasonable diligence is measured by what “the IRS knew or should have known at the time it sent the [n]otice” of deficiency, including information it should know “through the use of its computer system.””

In the case of the Gregorys, not only had they sent in the new address on Forms 2848 and 4868, but their CPA was in direct contact with an individual revenue agent once the two Forms 2848 were successfully processed.  The Third Circuit also found it relevant that the CPA told the revenue agent about the new address, a fact omitted by the Tax Court.  By weighing these circumstances, the Third Circuit affirmed the principle that the IRS cannot simply ignore what it knows.  Actual knowledge counts and while taxpayers would be wise to follow IRS procedures for a change of address, practitioners should not shy away from pushing forward cases where circumstances may present a valid argument that the IRS failed to act on a known change of address.