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Innocent spouse tax time limit concerns

Divorce talk is in the news again with the separation of Maria Shriver and Arnold Schwarzenegger.

California Governor Arnold Schwarzenegger is joined by his wife Maria Shriver while being sworn into office for a second term by Supreme Court Chief Justice Ronald George during his inauguration ceremony at the Memorial Auditorium in Sacramento, California in this January 5, 2007 file photo. The former California first lady has moved out after 25 years of marriage, reported Los Angeles Times. The couple confirmed their separation in a joint statement released on May 9, 2011 after questions were raised by The Times. REUTERS/Rich Pedroncelli/Pool/Files (UNITED STATES - Tags: POLITICS ENTERTAINMENT)

Now I know nothing about the relationship of the Golden State's former first couple, but every time I hear about a marriage on the rocks, I think taxes.

In my defense, you're here because this is a tax blog.

In my further defense, the connection between taxes and marital trouble is not really that much of a stretch.

Matrimony and money experts agree that finances are a major cause of conflict in relationships. Sometimes a spouse's concern about a partner's fiscal management extends to tax time.

In those cases, a husband or wife might decide it's wiser to file separate tax returns. The dual filing choice could distance the dubious spouse from his or her partner's tax troubles if later the IRS is similarly skeptical.

Sometimes, though, married folks are in the dark when it comes to their spouse's activities. I'm nearing my 30th wedding anniversary and the hubby and I are very good about sharing, but even I can attest to an occasional instance when the hubby went off on his own. Non-tax, of course!

But when it comes to meeting tax obligations as a couple, spousal ignorance definitely is not bliss.

When a husband and wife sign a joint return, both are equally responsible for what the document includes or, more problematically in many instances, what it omits.

There is some relief for spouses who honestly are unaware of their partners' tax tricks. They can ask the IRS for innocent spouse relief.

However, 49 Representatives and three Senators believe there is a big problem with the existing innocent spouse rules.

Led by Reps. Pete Stark (D-Calif.) and Jim McDermott (D-Wash.), the lawmakers last month sent a letter to IRS Commissioner Doug Shulman asking him to review the rules that give spouses only two years to file for protection as an innocent spouse. A similar letter was sent to Shulman by Sens. Max Baucus (D-Mont.), Tom Harkin (D-Iowa) and Sherrod Brown (D-Ohio).

The members of Congress say that the two-year threshold is arbitrary and in many cases not long enough.

"The IRS should not be in the business of curtailing protections for innocent taxpayers, but the two-year limit in the innocent spouse rule does just that," said Stark. McDermott added that the two-year deadline for seeking innocent spouse relief was not intended by Congress when it passed the law.

"We made important changes to protect innocent taxpayers seeking relief from their spouses' liability to ensure fair and equitable treatment," said Baucus. "Now, we are concerned this two-year limitation denies relief to the very taxpayers the law was designed to help -– the innocent spouses unaware of these IRS collection activities because of intimidation or deception by their spouse."

"Allowing the truly innocent spouse the right to file for protection without an arbitrary deadline is crucial since, in many cases, they simply do not know what was done until the IRS informs them," said Harkin.

The lawmakers also sent a copy of their letters to National Taxpayer Advocate Nina Olson, who said she was "ashamed of the IRS" in a case where the agency tried to collect from a woman who had been physically abused by her husband because her innocent spouse request was "not timely." The Tax Court ultimately overruled the IRS.

And while the signers of the letters to Shulman are all Democrats, Reps. Michele Bachmann (R-Minn.) and Mike Fitzpatrick (R-Penn.) introduced H.R. 1450, a bill that would eliminate the innocent spouse request time limit, a few days before their colleagues mailed their letters to Shulman.

The lawmakers now have received some good news.

Shulman has replied to the Congressional correspondence with his own letter, noting that "in February I announced a number of initiatives as part of a Fresh Start program to assist taxpayers who find themselves unable to pay the tax they owe. As part of this effort, I also asked for a review of the rules governing innocent spouse determinations … to ensure that we provide innocent spouses opportunities to present their claims and receive the relief they are entitled to under the law."

Given the Congressional and Taxpayer Advocate interest, don't be surprised to see the IRS soon issue a regulation eliminating the two-year innocent spouse filing time limit.

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This underscores the importance of both partners in a marriage understanding every penny that gets reported or deducted on a joint tax return. Too many couples "leave the finances" to just one spouse, not understanding the implications down the road.

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