How to Win an Innocent Spouse Case The Workshop Eric L. Green, Esq. - - PDF document

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How to Win an Innocent Spouse Case The Workshop Eric L. Green, Esq. - - PDF document

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How to Win an Innocent Spouse Case The Workshop Eric L. Green, Esq. 1 About Tax Rep LLC Tax Rep is a member driven community that helps each other build their representation practice and help taxpayers, with members being able to do so knowing they

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How to Win an Innocent Spouse Case

Eric L. Green, Esq.

The Workshop

2 Biggest Tax Screw‐Ups

Tax Rep is a member driven community that helps each other build their representation practice and help taxpayers, with members being able to do so knowing they are not practicing on their own but have other accountants and attorneys backing them up. If you are interested in joining (and getting today’s program for free) you can join Tax Rep at www.TaxRepLLC.com, use TAXREPNOW to save $100 a month for 3 months and start building your practice today!

About Tax Rep LLC

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Biggest Tax Screw‐Ups

 Managing partner in Green & Sklarz LLC, a boutique tax firm with

  • ffices in Connecticut and New York.

 Focus is civil and criminal taxpayer representation before the

Department of Justice Tax Division, Internal Revenue Service and state Departments of Revenue Services.

 Has served as a columnist for CCH’s Journal of Practice & Procedure.  Attorney Green is the past Chair of the Executive Committee of the

Connecticut Bar Association’s Tax Section.

 Eric is a Fellow of the American College of Tax Counsel (“ACTC”).

Eric Green, Esq.

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4

Biggest Tax Screw‐Ups

 Eric is the host of the weekly Tax Rep Network Podcast,

available in ITunes, Apple Podcasts and Google Podcasts

 Eric is the founder of Tax Rep Network, an online community

designed to help tax professionals build their IRS Representation Practice

 He is the author of the Accountant’s Guide to IRS Collection,

the Accountant’s Guide to Resolving Tax Issues, and the Accountant’s Guide to Resolving Payroll Taxes and Personal Liability

Eric Green, Esq.

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Innocent Spouse Workshop

 There will be 16 attendance check words  Please write these down  You will need them at the end when you click on the link

and go get the certificate

CPE

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Innocent Spouse Workshop

 Stick to our schedule  10 Minute breaks at the top of

each hour

 Go to the restroom and refill

your coffee (or drink of choice)

Schedule

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QUICK BREAK

We will resume the program in a moment.

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History of Innocent Spouse

  • Prior to 1928: Spouses all filed separate returns, as joint filing was

unavailable.

  • 1928: Joint filing is allowed by Congress.
  • 1938: Congress enacts joint & several liability provisions for

taxpayers filing joint tax returns.

  • 1948: Income splitting is included in the Internal Revenue Code.

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History of Innocent Spouse (cont.)

  • 1961: The United States Supreme Court decides James v. United

States, 366 U.S. 213 (1961), holding the proceeds from illegal activities are taxable income

  • 1971: After James v. United States, the IRS and Justice Department

begin pursuing the spouses of criminals

  • IRC § 6013 is created, allowing innocent spouse relief for income
  • mitted by the culpable spouse.

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History of Innocent Spouse (cont.)

  • 1984: IRC § 6013 is amended to include erroneous items

(deductions taken on the return with no basis in fact or law).

  • 1998: The IRS Reform Act repeals IRC § 6013 and creates IRC § 6015
  • 2009: Lantz v. Commissioner
  • 2011: IRS reverses its position on equitable relief. See Notice 2011‐

70 and Office of Chief Counsel Notice CC‐2011‐017

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Why Do We Need Innocent Spouse Relief?

  • Spouses may file a joint tax return. I.R.C. § 6013
  • Both spouses are individually liable for the taxes due on a joint tax

return regardless of who earned the income and the IRS can collect from both spouses. I.R.C. § 6013(d)(3)

  • May lead to inequitable results
  • Death
  • Separation or divorce
  • Returns filed without consent
  • You can MFS and amend to go joint. You cannot amend a joint to go

separate once its filed

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Joint Liability

  • Paragraph inserted into divorce agreements making one spouse

liable is not binding on the IRS

  • This is really grounds for suing your former spouse when the IRS

seizes assets and/or income

  • It will be one item considered for equitable relief in innocent

spouse

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Identifying and Resolving Conflicts of Interest

  • Practitioners Generally
  • Circular 230 forbids a tax practitioner from representing a client before the

IRS if the representation involves a conflict of interest. 31 C.F.R. § 10.29(a).

  • A conflict of interest exists if, among other situations, the representation of one client

will be directly adverse to another.

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Identifying and Resolving Conflicts of Interest

  • Lawyers
  • Rule 1.7 of the Model Rules of Professional Conduct, Conflict of Interest,

provides:

  • “[A] lawyer shall not represent a client if the representation involves a concurrent

conflict of interest. A concurrent conflict of interest exists if: (1) the representation of

  • ne client will be directly adverse to another client; or (2) there is a significant risk that

the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or by a personal interest of the lawyer.”

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Identifying and Resolving Conflicts of Interest

  • Tax Court Rules (applies to lawyers and non‐attorneys admitted to

the Court)

  • Rule 24(g) of the Tax Court Rules of Practice and Procedure provides as

follows:

  • “If any counsel of record * * * represents more than one person with differing

interests with respect to any issue in a case * * * then such counsel must either secure the informed consent of the client * * *; withdraw from the case; or take whatever

  • ther steps are necessary to obviate a conflict of interest”.

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Identifying and Resolving Conflicts of Interest

  • Strategies to Resolve Conflicts of Interest Between Spouses:
  • A practitioner may represent a client despite the conflict of interest if

the practitioner obtains the informed consent of each affected client. Model R. Prof’l Conduct, 1.7(b); 31 C.F.R. § 10.29(b); Tax Ct. R. Prac. &

  • Proc. R. 24(g).
  • Included in the materials is a sample waiver of the potential conflict of

interest.

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Step 1: Was There a Valid Joint Return?

  • General Rule: The most important factor in deciding whether a

return qualifies as a joint return is whether the couple intended to file a joint return.

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Step 1: Was There a Valid Joint Return?

  • Paper Returns Not Signed by Spouse: In general, a return must be signed by both spouses to be a

valid joint return.

  • Exception 1: Express Consent to File Joint Return:
  • Where one spouse expressly authorizes the other spouse to sign the return, courts have found the

requisite intent for a joint return.

  • Exception 2: Tacit Consent to File Joint Return:
  • Where one spouse tacitly consents to the filing of a joint return, courts have found the requisite intent for

a joint return.

  • Electronically Filed Returns:
  • For electronically filed returns, whether a requesting spouse signed a return is determined by examining whether

he or she signed the Form 8879, IRS e‐file Signature Authorization.

  • Did the spouses file separate returns?

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Step 1: Was There a Valid Joint Return?

  • Tacit Consent
  • Did the requesting spouse have a filing requirement?
  • Did the requesting spouse file a joint return for prior years?
  • Did the requesting spouse participate in preparation of return?
  • Did the requesting spouse receive a tax benefit?
  • Did the requesting spouse have a non‐tax reason to file a joint tax return?

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Step 1: Was There a Valid Joint Return?

  • Returns Signed Under Duress: A return signed under duress is not a

joint return

  • Proving Duress: To prove duress, the spouse must show that he or she:

(1) was unable to resists the demands to sign the return, and (2) would not have signed the return but for the constraint applied to his or her will.

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Step 1: Was There a Valid Joint Return?

  • Forged Returns
  • Requesting spouse did not sign the return and there was no tacit consent.
  • There is no ASED for the requesting spouse, until he or she files a return.
  • The ASED for the nonrequesting spouse begins when the joint return was

due to be filed, or was filed, whichever occurred later

  • If the signature was forged, but the return is also unlawful or invalid,

process as a forgery.

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Step 1: Was There a Valid Joint Return?

  • Invalid and Unlawful Returns
  • Amended return changing to separate filing status filed prior to the due

date of the return.

  • The ASED begins when the joint return was due to be filed, or was actually

filed, whichever occurred later.

  • All previously issued refunds must be taken into consideration.
  • When it has been determined that the joint election was invalid (e.g., the

taxpayers were not married, the IRS will determine each taxpayer’s separate liability.

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Innocent Spouse

  • IRC 6015 Creates 3 types of innocent spouse relief
  • B – Innocent Spouse Relief
  • C – Separation of Liability Relief
  • F – Equitable Relief

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IRC 6015(b) Relief

  • Understatement is due to an erroneous item
  • Innocent spouse did not know or have reason to know of the understatement
  • Inequitable to hold them responsible for the tax
  • Requested relief within 2 years of when collection activity began
  • Allocation of the liability
  • Refund is available if granted within 3 years of the return filing

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IRC 6015(c) Relief

  • Must be divorced or legally separated for at least 12 months
  • No actual knowledge of the understatement of the item giving rise

to the liability

  • Must be requested within two years of collection activity beginning
  • Will be treated as if they filed separately
  • No refund available here, but liability is separated

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Erroneous Item

  • Improper deductions (cheating husband with the girlfriend)
  • Omitted income (gambling accountant, skimming from the

restaurant)

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IRC 6015(f) Relief

  • Revenue Procedure 2013‐34 lays our the IRS approach to evaluating

claims for equitable relief

  • Takes into account all facts and circumstances
  • For underpayments you must use equitable relief (ex‐husband’s

bogus estimated payments)

  • Liability is apportioned
  • Refunds are available

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Factors IRS will consider for equitable relief

  • Collectability – 433 analysis
  • CNC is good but not necessary
  • Number of factors

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Other Factors the IRS will consider

1.

Marital status.

2.

Economic hardship.

3.

Knowledge or reason to know.

4.

Non-requesting spouse’s legal obligation.

5.

Significant benefit.

6.

Compliance with income tax laws.

7.

Abuse

8.

Physical/mental health

9.

Financial dominance

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Summary – Equitable Relief

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Hell Hath No Fury…

  • Restaurant with the skimming ex‐husband
  • Landscapers and cashing checks to pay the undocumented workers
  • Be careful before you whistleblow…

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Whistleblowing; Be Careful What You Wish For…

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The Request

  • The election is made by filing IRS Form 8857, “Request for

Innocent Spouse Relief”

  • The Form must be filed within two years after the IRS begins

collection activity for the tax return in question in order to

  • btain relief under either IRC § 6015(b) or IRC § 6015(c)

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Form 8857

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Form 8857

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Reasonable Collection Potential

  • Gross monthly income
  • Allowable expenses
  • Determine future income
  • Net equity in assets (QSV)
  • FI + NE = RCP

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Financial Guidelines

Gross monthly income Allowable v. actual expenses Why most

  • ffers/IA

requests are denied

https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards

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Food, Clothing & Misc. (national std)

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Housing (local by county)

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Transportation

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Transportation – Operating Regions

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Out of Pocket Health Care Costs

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Financial Guidelines

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All RCP Planning Still Applies!

  • You do the same planning here that you do in an OIC
  • Focus on what they are not spending
  • Line up everything for 2 reasons:
  • 1. To sell the innocent spouse
  • 2. In case the Innocent Spouse claim fails

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4.03(2)(b) Economic hardship. Whether the requesting spouse will suffer economic hardship if relief is not granted. For purposes of this factor, an economic hardship exists if satisfaction of the tax liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses

 Uses similar analysis of uncollectible for collection  250% of the poverty guideline (low income)

Economic Hardship: Rev Proc 2013‐34

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Low Income Guidelines

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Requesting Innocent Spouse Relief

  • Prepare to support your case with documentation
  • Consider whether the returns were actually signed by the innocent

spouse (E‐Filed)

  • Focus on inability to pay if they are CNC
  • Prepare to Appeal the centralized units decision

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Collection Activity

  • IRS off‐sets the taxpayer’s income tax refund;
  • The filing of a claim by the IRS in a court proceeding;
  • The filing of a suit by the United States against the taxpayer to

collect the joint liability;

  • The issuance of an IRC § 6330 notice of the IRS’s intent to levy

and the taxpayer’s right to a Collection Due Process (CDP) hearing

  • Can raise at your CDP hearing (See Form 12153)

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Other Issues

  • Did the client even sign the return?
  • Did he or she have knowledge of the issue (he’s been skimming for

years!)

  • Former spouse can intervene (33% relief when they do vs 25%

when they don’t)

  • Not a forum for retrying your divorce!

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United States Tax Court

  • File the case
  • $60 fee
  • IRS Office of Chief Counsel will respond (45 days)
  • Consider Qualified Offer to resolve the case

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An Offer They Can’t Refuse

  • IRC §7430 Qualified Offer
  • Anytime from Appeals until 30 days before trial
  • Sets the bar for who is the prevailing party
  • Obtain costs from the IRS
  • Legal fees
  • Help settle your case!

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Qualified Offer

Dear Mr. _________: This is a Qualified Offer made pursuant to I.R.C. Sec. 7430(g). The taxpayer offers to settle for $_________.00 the proposed responsibility for her 2012, 2013 and 2014 federal income tax returns. This Offer shall remain open until the earliest of the date such offer is rejected, the date trial begins, or the 90th day hereafter in accordance with

  • Treas. Reg. Sec. 301.7430‐7.

Thank you.

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 The spouse of the taxpayer that files for innocent spouse is allowed to

intervene

 They will be notified of the filing and can submit information and testify as to

why the taxpayer should NOT be given relief

 This is often an issue when you have an abused spouse, because the filing

cannot be kept a secret

The Intervening Spouse

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 IRC § 6015(h)(2): NRS must be notified and given an opportunity to

participate in any administrative proceeding

 If full or partial relief is granted to the RS, the NRS can file a protest with IRS

Appeals

 NRS can intervene if RS filed a petition in Tax Court  NRS can’t appeal the Tax Court decision  NRS can’t petition the Tax Court

Non‐Requesting Spouse (NRS)

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NRS Notice

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 Taxpayers receive relief in 25% of cases  In cases where NRS intervenes, it increases to 35%  Reason: Not a place to refight the divorce  If you represent the NRS, make sure you intervene in a professional way:

~ Text messages case ~ Submit documents ~ Submit affidavit

Non‐Requesting Spouse – Tax Court

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Checklist for the Taxpayer

  • Was there a valid tax return?
  • Did the client know or have reason to know

about the erroneous item?

  • Are there factors that suggest the taxpayer

should not be responsible (13 factors)

  • Does the client have an ability to pay?

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Checklist

  • If rejected appeal
  • Look out for idiotic answers from the IRS

(Lisa’s valid return but relief anyway)

  • Can create issues for the state relief

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Advice to divorcing spouses

  • If returns need to be filed, file Married‐Filing Separately!
  • The agreement the other person is responsible is almost

meaningless

  • No unallocated alimony/child‐support

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Taxpayer’s in Collection 12/31/2019…

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Non‐Filers

More than 10 million (Before COVID‐19)

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 Is there a real advantage to filing joint?  Does one have a business, should we be concerned?  For Non‐Filers, consider the collection aspects first  What is the end game, and engineer backwards

Think before you file joint!

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 How much will the returns show is due?  How is this getting paid? If not a full‐pay, then  What does the taxpayer’s RCP look like?  Can we adjust the RCP – make financial moves that allow us to become Offer

candidates? ~ MFS vs MFJ? ~ State returns first? ~ Time to go shopping?

Think before you file joint

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 Health Insurance  Term Life Insurance  Disability insurance for self‐employed  Borrowed retainers for representation

Shopping?

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 CAVEAT: This works in Separate Property States, not so much in Community

Property States

 Consider filing Married filing separate to keep the other spouse out of the

debt (and RCP)

Strategy ‐ MFS instead of MFJ

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 Delinquent state tax debts are 100% allowed as an RCP expense IF THE STATE

IS IN PRIORITY POSITION OVER FEDS!

 If file together IRC 6321 puts IRS in first position (according to IRS)  Only allowed a portion of the payment

File the State First

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 Husband and Wife are non‐filers for last 8 years  Major issues have occurred  He is self‐employed, she is a stay at home mom  He has a pick‐up truck and small IRA, earns $180,000/yr  She left a corporate job in NYC, has an IRA with $500,000 and inherited their

home worth $1.2 million, no mortgage

Example

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 Go to CPA who does the last 6 years of tax returns MFJ  Owe IRS $300,000 and CT $120,000  He has future available income of $3,800 a month

Example

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 They can easily full‐pay from assets  He can also full pay from future income ($3,800 x 120 months on collection

statute is more than the liability)

 Have him redo them MFS: He now owes $380,000 to IRS and $150,000 to CT.

She owes nothing

 File CT returns. Once the bills arrive negotiate for $3,800 a month payment

plan.

 His Future Income is $0, and his assets are $4,100 for truck and net IRA

Example

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 This work can be fascinating  This work can be satisfying  It cannot be done on auto‐pilot (ask Roni Deutch or tax Masters)

Need to think

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 Injured Spouse is the opposite of Innocent Spouse  Here we don’t owe the money but lost a joint refund  Can recover if we submit the request timely for our portion of the refund  Form 8379 is filed when you are aware the refund is taken

Injured Spouse: Allocation

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Injured Spouse: Allocation

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CASE STUDIES

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 Amy is divorced with two minor children, one of whom is autistic  Amy is a free‐lance artist  She receives $3,270 a month from her former husband for child support, but

not consistently

 Her ex‐husband was extremely abusive, received a buyout from his company  Placed the buyout money in a private account and subsequently lost it over

two years in the stock market

 He admitted during their divorce to forging her name on the returns

Case Study #1: Amy

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 They now owe $179,078 for 2013 and $50,906 for 2015  Amy is physically disabled herself due to significant next and body issues, and

is learning disabled with ADHD

 Files for innocent spouse relief with her accountant  Friend who works at the IRS realizes their filing in insufficient and refers her to

us after denied

 Brought in through the LITC at UConn, we file the Appeal

Case Study #1: Amy

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 Appeal hearing is 2 minutes, claim she needs to file for an Offer  Refuses to consider anything else  Denies relief  We file the Petition in US Tax Court (mostly because I wanted to through the

Appeals Officer under the bus publicly)

Case Study #1: Amy

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Petition

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Petition

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Petition

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Petition

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Case #1: Government’s Answer

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 Pointed out her RCP is  Also taxes can be discharged in bankruptcy  Have witnesses of the abuse  Have video of the abuse  She had no access to the accounts nor knowledge of his day trading  Counsel has called and said they see no reason to try this case….

Where this case stands

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 Frank comes to see us  His ex‐wife is an investment banker and was having an affair  They are now divorced but owe $800,000 from their last joint return, which

was in 2018

 He was a stay at home dad and is now working for a small company in his

  • town. He has sole custody of their two minor daughters

 Frank receives $1,000 a month for child support and $1,000 a month for

alimony

Case #2: Frank

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 The ex‐wife burned through her savings so there are virtually no assets left  She filed for uncollectible status with the IRS after her job fell apart and the

partnership kicked her and the other partner she was having an affair with out

  • f the firm

 Frank owns a car and is now renting an apartment  The ex‐wife is working part time for a small investment partnership and claims

she is making no money right now

Case #2: Frank

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Case #2: Frank’s financial

Income Actual Expenses Actual Allowable Wages (yourself) 4,000 $ Food, Clothing and Misc 1,433 $ 1,433 $ Wages (spouse)

  • $

Housing & utilities 3,000 $ 2,424 $ Interest - Dividends

  • $

Vehicle Ownership

  • $
  • $

Net Business Income

  • $

Vehicle Operating Costs 242 $ 242 $ Net Rental Income

  • $

Public Transportation

  • $
  • $

Distributions

  • $

Health Insurance

  • $
  • $

Pension/Soc Sec (taxpayer)

  • $

Out of Pocket HealthCar 168 $ 168 $ Pension/Soc Sec (spouse)

  • $

Court ordered pmts

  • $
  • $

Social Security (taxpayer)

  • $

Child/Dep Care

  • $
  • $

Social Security (spouse)

  • $

Life Insurance

  • $
  • $

Child Support 1,000 $ Current Year Taxes 880 $ 660 $ Alimony 1,000 $ Secured Debts

  • $
  • $

Other Income

  • $

Delinquent State Taxes

  • $
  • $
  • $

Student Loans

  • $
  • $
  • $

Total Living Expenses 5,723 $ 4,927 $ Total 6,000 $ Net Difference 277 $ 1,073 $

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 Currently Frank shows he is positive $1,073 which the IRS will want  Can we spend it? Health insurance and term life insurance?  We can strategize to make him CNC:

~ Gets IRS to hold off on enforcement ~ Sets up a hardship claim for innocent spouse ~ lines up an OIC if innocent spouse claim fails

Case #2: Frank

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Case #2: Frank

Income Actual Expenses Actual Allowable Wages (yourself) 4,000 $ Food, Clothing and Misc 1,433 $ 1,433 $ Wages (spouse)

  • $

Housing & utilities 3,000 $ 2,424 $ Interest - Dividends

  • $

Vehicle Ownership

  • $
  • $

Net Business Income

  • $

Vehicle Operating Costs 242 $ 242 $ Net Rental Income

  • $

Public Transportation

  • $
  • $

Distributions

  • $

Health Insurance 1,000 $ 1,000 $ Pension/Soc Sec (taxpayer)

  • $

Out of Pocket HealthCar 168 $ 168 $ Pension/Soc Sec (spouse)

  • $

Court ordered pmts

  • $
  • $

Social Security (taxpayer)

  • $

Child/Dep Care

  • $
  • $

Social Security (spouse)

  • $

Life Insurance 120 $ 120 $ Child Support 1,000 $ Current Year Taxes 880 $ 660 $ Alimony 1,000 $ Secured Debts

  • $
  • $

Other Income

  • $

Delinquent State Taxes

  • $
  • $
  • $

Student Loans

  • $
  • $
  • $

Total Living Expenses 6,843 $ 6,047 $ Total 6,000 $ Net Difference (843) $ (47) $

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 Have Frank get the term insurance and health insurance  File the 8857  Highlight the critical facts, especially the hardship issue

Case #2: Frank

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Resources

Resources: Tax Rep Network: www.TaxRepLLC.com and use TAXREPNOW

  • Get this program for free
  • Save $100 a month for three months while you build

your practice

93 Offer‐in‐Compromise Workshop

Inside Tax Rep

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Inside Tax Rep

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Resources

Resources: Tax Rep Network: www.TaxRepLLC.com and use TAXREPNOW Tax Help Software: https://www.taxhelpsoftware.com/ ~ 14 day free trial: TAXREPTRIAL ~ 10% discount: TAXREP10 Call Enq: https://callenq.com/trn/ ~ (200 min for $19.97)

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Questions?

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