The federal Taxpayer First Act, enacted July 1, 2019, altered the procedures governing innocent spouse relief in Tax Court1 by requiring practitioners to submit all available information to the IRS during an audit. Specifically, Section 1203 amended Internal Revenue Code (IRC) Section 6015 to add a new subsection – (e)(7) – that provides for a de novo standard of review for a Section 6015 determination by the IRS based on “the administrative record established at the time of the determination” and “any additional newly discovered or previously unavailable evidence.” Taxpayers who wish to assert an innocent spouse claim for tax or penalty relief from liability on a joint return should be advised to make a complete disclosure of all relevant facts during the audit. Tax Court judges must rely on the same information that the IRS used for its consideration, unless new facts come to light.
By enacting this legislation, Congress converted innocent spouse relief into a unique process at the Tax Court.
Administrative records and record reviews are common in nontax cases in which the courts review decisions by federal agencies to determine if the agency acted consistent with federal law or if its actions were arbitrary and capricious. In these record review cases, the court examines all of the information that was placed before the federal agency at the time of its decision. In the subsequent court proceeding, the parties usually do not call witnesses; instead, the private party argues that the government’s actions were legally erroneous. The court reviews the administrative record compiled by the government and used to justify its decision.
In these administrative record review cases, courts generally do not second-guess decisions by the federal agency, especially on factual determinations. Prevailing in a record review case can be difficult because the court defers to the government agency. In contrast, most civil litigation is de novo, meaning the trial court hears live witness testimony and considers all evidence anew.
In a tax context, record reviews are far less common. Taxpayers commonly challenge audit determinations, and those challenges are de novo trials in which each side presents evidence to support its position. In the context of collection actions, the evidence examined at Tax Court varies depending on the geographic residence of the taxpayer. In some instances, the Tax Court will limit its review to the information presented during the collection due process (CDP) hearing, and will only overturn an appeals officer’s decision if she or he acted arbitrarily. However, in most instances – including matters involving Pennsylvania residents – the petitioner is permitted to present additional evidence at Tax Court.
The innocent spouse amendment creates a new type of proceeding in the context of taxpayer litigation.2 A taxpayer (or the taxpayer’s representative) should now be advised to make all of her or his arguments to the IRS by presenting all documents and making any relevant witnesses available. If the taxpayer fails to raise all relevant arguments, she or he will likely be prohibited from raising these issues at Tax Court. The Tax Court judge may consider only evidence that was presented to the IRS (unless it was newly discovered or previously unavailable). For example, if the innocent spouse submits a written witness statement to the IRS, the Tax Court may review that statement and exercise more leniency.
Most innocent spouse cases are filed at Tax Court after a taxpayer files a request for relief on Form 8857 and the IRS partially or fully denies the request.3 At the administrative level, innocent spouse cases are usually initially reviewed by a specialized unit. The taxpayer may then appeal an adverse administrative determination to an appeals officer before proceeding to Tax Court.
Under the newly enacted Section 1203, the Tax Court makes a de novo review of the IRS’s determination, but the Tax Court judge may only consider the information and documents that had been presented to the IRS (unless shown to be newly discovered or not previously available). This evidence is memorialized in an “administrative record,” which has been defined by the IRS to mean the following:
The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the appeals officer or employee in making the determination under Section 6330(c)(3), will constitute the record in the Tax Court review of the Notice of Determination issued by appeals.
Although this definition refers to records collected during a CDP, it can be analogized to audit records.
The IRS has broad discretion to collect information. Although the Internal Revenue Manual instructs revenue agents to maintain records like examiner’s logs and lead sheets, the IRS has no policy about what information gets recorded. In innocent spouse cases, some IRS employees maintain robust notes while others do not. The taxpayer will not know what information was recorded (or the level of detail) until she or he proceeds to Tax Court. Accordingly, when asserting an innocent spouse claim on behalf of a client, here are a few practice tips:
- Always correspond with the IRS in writing – It is sometimes unclear what information the IRS is actually considering. If the taxpayer’s representative provides the client’s position in writing, there will be an indisputable record. This also means that the taxpayer’s Form 8857 should be very detailed. Similarly, if the taxpayer submits additional evidence to the settlement officer during the appeals conference, that submission should be in writing.
- Provide third-party witness statements in signed, written format – The IRS has broad discretion to contact third parties after receiving taxpayer authorization. The only way to ensure that the key facts important to the taxpayer’s innocent spouse claim are considered at Tax Court is to provide statements in writing to the IRS. In particular, if the income-earning spouse is supporting the taxpayer’s claim, make sure that spouse’s statement is documented in writing.
- Do not count on introducing additional evidence at Tax Court – Courts regularly reject efforts by litigants to ask for new trials or set aside jury verdicts because of newly discovered evidence. Courts usually require counsel to show that the new evidence could not have been discovered with due diligence. It is hard to conceive of new evidence that would surface in an innocent spouse proceeding, especially if one applies a diligence standard.
If an IRS agent’s notes are vague or if the taxpayer disputes the facts in those notes, there is authority to supplement the administrative record with new evidence. However, courts sparingly apply this allowance. The cases in which a court is most likely to permit a taxpayer to supplement the record involve instances in which it is clear that the government failed to include relevant evidence in the administrative record. Accordingly, if the taxpayer sent letters to the IRS and they have not been included in the administrative record, the taxpayer may supplement the record with these plainly omitted items. However, if the information is conveyed to the IRS appeals officer in a phone conversation, the Tax Court likely will not be in a position to consider that evidence.
Section 1203 of the Taxpayer First Act will likely spawn substantial litigation about the scope of review. Practitioners are advised to assume the worst and make their best arguments to the IRS, even if they believe that the auditor or settlement officer will not be sympathetic. Failure to preserve and document the taxpayer’s arguments to the IRS may preclude those arguments from ever being considered by the Tax Court.
1 Through “innocent spouse relief,” a married person can be relieved of responsibility for paying tax, interest, and penalties if the spouse (or former spouse) improperly reported or omitted items on the joint tax return.
2 The Tax Court handles a small number of matters in which the petitioner is not the taxpayer, notably whistleblower claims. The Tax Court has taken the position that whistleblower claims are to be handled like record reviews, where the Tax Court will only set aside an arbitrary decision to deny a reward.
3 The Tax Court has jurisdiction to hear innocent spouse cases without a prior determination when it is pled as an affirmative defense in a deficiency action or where a stand-alone petition for relief is filed in situations in which a Form 8857 was filed with the IRS but six months has passed without a final determination by the IRS Commissioner.
Jed M. Silversmith, JD, is an attorney at Blank Rome LLP in Philadelphia. Previously, Silversmith worked at the U.S. Department of Justice, Tax Division, where he prosecuted tax evasion cases. He can be reached at firstname.lastname@example.org.