Tax Administration:

Innocent Spouse Relief

GGD-98-77R: Published: Mar 11, 1998. Publicly Released: Mar 11, 1998.

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Pursuant to a congressional request, GAO reviewed innocent spouse tax administration issues, focusing on ways: (1) divorce decrees can be made a consideration in determining the tax liability in innocent spouse cases; (2) legislation for using a proportionate liability option for innocent spouse claims can be implemented; (3) legislation can help to ensure that the Internal Revenue Service (IRS) effectively administers the innocent spouse provisions; (4) IRS could centralize the processing of a new innocent spouse form to help ensure that relief determinations are fair, equitable, and timely; and (5) IRS' current innocent spouse regulations need to be updated to reflect legislative changes.

GAO noted that: (1) requiring IRS to be bound by divorce decrees in innocent spouse relief determinations is impractical for two major reasons: (a) federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; and (b) this proposal could require IRS to become involved in every divorce settlement to ensure that the government's interest is protected; (2) if Congress wishes to make proportionate liability an option in cases where joint and several liability would result in inequitable treatment of one spouse, the existing authority of the Secretary of the Treasury could be expanded statutorily to allow for this; (3) this could be done by allowing, at IRS' discretion, couples who filed jointly to amend their return(s) and file separately or by allowing IRS the option of determining the tax liability of the individual in innocent spouse cases using a proportionate liability standard; (4) both the Department of the Treasury's and GAO's reports recommended ways to improve the administration of the current innocent spouse provisions; (5) these recommendations include creating a form for requesting innocent spouse relief, revising publications to better educate and inform taxpayers about the provisions, training IRS staff in how to handle innocent spouse claims, and developing a process for ensuring consistency in processing innocent spouse claims; (6) an IRS official told GAO that the new innocent spouse form is expected to be available for public use by March 31, 1998, and that staff training on innocent spouse issues is under way; (7) however, IRS has not decided where or how the form will be processed; (8) these decisions are expected to be made by the time the form is ready for use; (9) an IRS official said that most innocent spouse determinations will be made by Examination staff at a central location; (10) the official said that some determinations will be made in field offices; (11) the last time innocent spouse regulations were updated was in 1974; (12) the current regulations do not cover the innocent spouse provisions resulting from the 1984 Tax Reform Act, which extended relief to include grossly erroneous deductions, credits, and basis; (13) if the changes to the innocent spouse provisions contained in the proposed Taxpayer Bill of Rights 3 are made, there would be no need for the Treasury to write regulations dealing with grossly erroneous items; and (14) however, if the legislation does not pass this legislative session, Treasury should incorporate the 1984 changes in its regulations.

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