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Why ‘Crying Innocent’ May Get Easier

It’s not unusual for a person to learn – sometimes years later – that a current or former spouse tried to cheat the IRS on a joint tax return.

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Crying innocence can be a valid defense, but a fight is on about how long they have to make that claim.

Right now, the Internal Revenue Service’s “innocent spouse” rules require that a claim of ignorance must be filed within two years of when it starts collecting back taxes. But courts have differed with the IRS and among themselves about that limit. Exactly who can use the defense also is in dispute. Meanwhile, the lawsuits have stacked up.

Earlier this month, nearly 50 members of Congress threw their weight behind advisers and taxpayers who want the time limit to be longer. The group, which includes Rep. Sander M. Levin (D-Mich.), ranking minority member on the House Ways and Means Committee, says 50,000 innocent spouse claims are filed with the IRS. Of these, about 2,000 are barred because of the time limit.

Tax advisers hope the Congressional pressure will help break the gridlock. IRS commissioner Doug Shulman said in a statement this week that the agency has started a review of the rules to ensure they give innocent spouses “reasonable opportunities” to present their claims.

Linda Lea Viken, a divorce attorney in Rapid City, S.D., and president of the American Academy of Matrimonial Lawyers, says a two-year limit is “a terrible idea” that defeats the whole purpose of the rule. Many times, she says, “it is years after a divorce that a party learns that their former spouse cheated on their taxes–without their knowledge.”

Often enough, it is a still-married spouse who employs the defense. “People will forgive a lot in marriage if they still love the person,” says Robert E. McKenzie, an attorney in the Chicago law firm Arnstein & Lehr LLP. In some of those instances, couples hold assets separately or have an economic hardship that makes the claim useful.

The the issue frequently comes up when a couple has divorced. The problem with the two-year limit is that deceit often happens in the twilight zone when the split is happening and communication has faltered. A spouse who gets a letter from the IRS could well conceal it if the relationship is on rocky ground.

National Taxpayer Advocate Nina E. Olson favors lifting the two-year limit. To highlight “the harsh impact of this rule,” she has pointed to cases where the IRS has gone after spouses who suffered physical or emotional abuse. These people didn’t know about their joint tax liabilities and so couldn’t invoke the innocent spouse rule in the proper time, she says.

The U.S. Tax Court has thrown out the two-year limit in cases in recent years, but the IRS has won two cases on appeal.

Bryan Camp, a professor at Texas Tech University School of Law, calls taxpayers in the court cases “collateral damage” in a fight that is really over the IRS’s ability to write a regulation and the Tax Court’s ability to supervise them. The lawmakers’ letter, he says, is encouraging.

“It gives the IRS a way to leave the battlefield with honor,” he adds.

Readers, have you ever raised the innocence rule?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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