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Federal Tax Clinic Works to Shape IRS "Innocent Spouse" Tax Policy

This article appears in the Fall 2011 CLINIC NEWS.

The Federal Tax Clinic (FTC) represents many victims of domestic violence by claiming the “innocent spouse” defense in federal income tax cases. This work has revealed significant inefficiency and discrimination in Internal Revenue Service (IRS) policy and practice. To remedy these problems, FTC faculty and students are drafting a recommendation for systemic advocacy change for submission to the Office of the National Taxpayer Advocate. Specifically, the FTC will recommend creation of an “innocent spouse” unit within the IRS and a change in the procedures the IRS uses to notify abusive spouses (or ex-spouses) of the opportunity to participate in “innocent spouse” proceedings initiated by the abused spouse.

An “innocent spouse” can seek release from liability on a jointly filed federal income tax return when the other spouse omits income or takes erroneous deductions. Prior to 1998, if one spouse (usually the ex-wife) filed an innocent spouse claim, the non-petitioning spouse had no notice of the proceeding. This resulted in the granting of innocent spouse status without providing the nonpetitioning spouse an opportunity to challenge the claim’s veracity. To remedy this, Tax Court rules were amended to require notice of the right to intervene. In an attempt to protect domestic violence victims, the IRS instituted “protections” that purport to provide privacy protection for petitioning spouses through issuance of protective orders. However, while a protective order may require redaction of identifying information, it does not protect the petitioner once a Tax Court petition is filed. The non-petitioning spouse still receives notice of his opportunity to intervene in the proceedings, and, although the IRS claims that it does not reveal the petitioner’s address, the address appears on the Certificate of Service ultimately filed with the court.

This practice is problematic for victims of domestic violence, many of whom are low-income immigrants and fear their former spouses. Because the nonpetitioning spouse receives notice of both the filing of the Tax Court petition and of the time and place of the Tax Court hearing, a number of fearful FTC clients have decided not to initiate claims or to withdraw claims already filed. Recently, one deserving client withdrew her claim because she feared her ex-husband would kill her outside the courthouse.

A domestic violence victim may have “constructive” or even “actual” knowledge of her husband's actions, but if fear of retribution prevents her from confronting the spouse, she may have a defense to the “knowledge” factor required in innocent spouse cases. A victim of physical, emotional, or economic abuse, therefore, has a strong case for consideration as an innocent spouse. Ironically, this is the very type of client who may choose to withdraw her claim.

Through the creation of an administrative process within the current innocent spouse unit, it may be possible to resolve cases involving domestic violence victims at an earlier stage so that they do not have to go to Tax Court and face the disclosure problems that follow. The FTC’s proposal will include mechanisms to protect those claimants who end up in Tax Court so that the IRS can protect the filing spouse without discriminating against the petitioning spouse. Clinic Director Sandy Freund aims to finalize and submit the proposal in the Fall 2011 semester.