Doors That Close: Offers, Closing Agreements, Prior Cases and Other Bars to Innocent Spouse Relief

Some of the most painful calls I get are from people who would have qualified for innocent spouse relief, except for something they did years earlier to make the IRS go away. They signed an offer in compromise. They signed a closing agreement at the end of an audit. They went to Tax Court on the deficiency and never raised the spousal issue. Each of those can shut the door.

This guide covers the bars to relief, so you can avoid them before you act, and figure out where you stand if you already have.

Offers in compromise

Treasury Regulation 1.6015-1(c)(1) says a requesting spouse is not entitled to relief under sections 6015(b), (c) or (f) for any tax year for which the requesting spouse has entered into an offer in compromise with the IRS. The Form 8857 instructions list this among the situations in which you should not file the form.

Think about what that means in practice. A spouse who is buried in a joint liability, and who might have qualified for relief, submits an offer and has it accepted. That spouse has resolved the liability by agreeing to pay a compromise amount. The opportunity to be relieved of the liability under section 6015 for those years is gone.

If you are considering an offer on a joint liability, evaluate innocent spouse relief first. If you qualify, relief may cost you nothing for your share, where an offer requires a payment.

Closing agreements

The same regulation says you are not entitled to relief for any tax year for which you entered into a closing agreement with the IRS that disposes of the same liability that is the subject of the claim. Closing agreements under section 7121 are final and binding agreements on a tax liability.

There is a narrow exception in Treasury Regulation 1.6015-1(c)(2) for certain agreements entered into while the requesting spouse was a party to a pending TEFRA partnership proceeding, concerning partnership items. The regulation's examples show how specific that exception is. If your case involves a partnership audit, get advice before signing anything.

Prior court decisions: res judicata

Section 6015(g)(2) says that if a decision of a court in a prior proceeding for the same taxable year has become final, it is conclusive, except with respect to the qualification of the individual for relief that was not an issue in that proceeding. That exception does not apply if the court determines the individual participated meaningfully in the prior proceeding.

Treasury Regulation 1.6015-1(e) puts it in operational terms. A requesting spouse is barred by res judicata for any year for which a court rendered a final decision on the requesting spouse's tax liability if:

• relief under section 6015 was at issue in the prior proceeding; or
• the requesting spouse meaningfully participated in that proceeding and could have raised relief under section 6015.

The regulation also says any final decisions on issues relevant to section 6015 are conclusive, and the requesting spouse may be collaterally estopped from relitigating them.

The Form 8857 instructions describe both situations: a court considered your request for relief and denied it; or a court did not consider it, but you meaningfully participated and could have asked.

What "meaningful participation" means for you

The statute and regulation do not define meaningful participation with a checklist. But the logic is clear. If you were a real participant in a Tax Court deficiency case for the year, signing pleadings, giving testimony, negotiating the outcome, the law expects you to have raised innocent spouse relief there. If you were a name on the caption and your former spouse ran the case without you, the analysis is different.

The lesson: if you are a party to any court case involving a joint year, raise section 6015 in that case. The guide to raising innocent spouse relief in a CDP hearing or deficiency case explains how.

Fraudulent schemes

Treasury Regulation 1.6015-1(d) says that if the IRS establishes that a spouse transferred assets to the other spouse as part of a fraudulent scheme, relief is not available under section 6015, and joint and several liability under section 6013(d)(3) applies. The regulation defines a fraudulent scheme broadly to include a scheme to defraud the IRS or another third party, such as creditors, former spouses or business partners.

For equitable relief, Revenue Procedure 2013-34 adds two related threshold conditions: no assets transferred between the spouses as part of a fraudulent scheme, and the requesting spouse did not knowingly participate in the filing of a fraudulent joint return.

Taxes section 6015 does not cover

Section 6015 relieves joint and several liability on a joint income tax return. Treasury Regulation 1.6015-1(a)(3) says relief is not available for liabilities that are required to be reported on a joint return but are not income taxes imposed under Subtitle A, and gives domestic service employment taxes under section 3510 as an example.

Liabilities that arise on other returns, such as business payroll tax returns, are outside section 6015 altogether because they do not arise from a joint return.

Transferee and property law liability

Winning relief does not always end the story. Treasury Regulation 1.6015-1(j) says section 6015 does not negate liability that arises under other laws. A relieved spouse may still be liable to the extent provided by federal or state transferee liability or property laws, and the requesting spouse's property may be subject to collection under those laws. The regulation's example involves a widow relieved under section 6015 who received all of her husband's estate; the IRS may still pursue her as a transferee.

One determination per assessment

Treasury Regulation 1.6015-5(c) says a requesting spouse is entitled to only one final administrative determination of relief for a given assessment, unless the second request qualifies under Treasury Regulation 1.6015-1(h)(5).

That exception is narrow but valuable. Under 1.6015-1(h)(5), a second election under section 6015(c) is a qualifying election if the first was denied solely because you did not meet the marital status requirements, and at the time of the second election you do. Divorced since your first try? You may get another shot at separation of liability, within the time limits.

Beyond that, IRM 25.15.17 describes an IRS reconsideration process when you submit information not previously considered and the collection or refund statute remains open. But the IRM is explicit that a reconsideration request is not a qualifying request under section 6015 and the result is not a final determination the Tax Court can review.

A checklist before you resolve any joint liability

Before you sign anything with the IRS on a joint year, run through these questions:

1. Is any part of this liability attributable to my spouse's income, deductions or credits?
2. Was the tax reported but left unpaid by my spouse?
3. Am I divorced, legally separated, widowed, or have I lived apart for 12 months?
4. Has the IRS taken collection action against me, and when?
5. Is there a court case pending or decided for this year, and what was my role in it?
6. Will the document I am about to sign, whether an offer, a closing agreement, or a stipulated decision, finally resolve the liability?

If the answers to the first three suggest you might qualify for relief, and the last answer is yes, stop and evaluate section 6015 before signing. An installment agreement, by contrast, is not on the list of bars in the regulation. Paying over time does not, by itself, give up your right to seek relief, though payments made from joint funds may not be refundable later.

The pattern behind all of these

Every bar on this list has the same root: the law wants spousal relief raised at the right time, in the right forum, before the liability is resolved some other way. If you are dealing with any joint liability, put section 6015 on the table first. Then decide on offers, closing agreements, and litigation strategy.