It isn't that unusual for a spouse to learn only after the fact that his or her mate (or ex-mate, if they're divorced) tried to cheat the IRS on a joint tax return.
Crying innocence can be a valid defense, but a fight is on about when that can be done.
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.
This week a group of nearly 50 lawmakers in Congress threw its weight behind advisers and taxpayers who want the time limit to be longer. The group, which includes Rep. Sander M. Levin, D-Mich., the 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.
The group's letter to the IRS, tax advisers hope, will help break the gridlock. IRS commissioner Doug Shulman said this week that the agency has started a review of the rules. Its purpose is to make sure they give innocent spouses "reasonable opportunities" to present their claims, he said in a statement.
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 said, "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," said Robert E. McKenzie, an attorney with the Chicago law firm Arnstein & Lehr LLP. In some instances, couples hold assets separately or have an economic hardship that makes the claim useful.
Often, though, the issue comes up with divorces. The problem with the two-year limit is that deceit often happens in the twilight zone when the split is happening and communication falters. 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. Since these people didn't know about their joint tax liabilities, they could not invoke the innocent-spouse rule in time, Olson said.
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' ability to write a regulation and the Tax Court's ability to supervise them. The lawmakers' letter, he said, is encouraging.
"It gives the IRS a way to leave the battlefield with honor."