David C. Holtz, J.D., LL.M., Former IRS Attorney

IRS is offering to suspend the issuance of a determination letter denying untimely claims for innocent spouse relief.  The United States Tax Court in Lantz v. Commissioner, 132 T.C. No. 8 (April 7, 2009) held that the two year statute of limitations deadline was not applicable to claims innocent spouse relief on the basis of equity under IRC Section 6015(f).  The IRS is appealing this decision to the United States Court of Appeals in the 7^th Circuit.  As a result, the IRS is offering to suspend the issuance of determination letters until the Court of Appeals issues its opinion.  In most cases, it is in the best interest of the taxpayer claiming relief to request that the IRS suspend the issuance of the determination.

There are generally three statutory bases for electing innocent spouse relief.   

• Relief Where Spouse had No Reason to Know about Tax Understatement.  Relief under IRC Section 6015(b) generally provides that a taxpayer who files a joint return on which the taxpayer had no reason to know that it contained an understatement of tax may obtain relief from all or a portion of the tax liability.  The deadline for electing 6015(b) relief is two years after the IRS first begins collection activities against the individual making the claim.
• Separate Liability Relief where Divorced or Separated:  Relief under IRC Section 6015(c) generally provides where a taxpayer is divorced or legally separated or no longer living together for 12 months, the taxpayer may elect to be liable only for the income attributable to himself or herself. The deadline for electing 6015(c) relief is two years after the IRS first begins collection activities against the individual making the claim.
• Equitable Relief:   Relief under IRC Section 6015(f) generally provides that where an individual does not qualify for relief under any of the above bases, then the IRS may relieve the taxpayer if it is inequitable to hold the individual liable for such taxes.  The statute does not contain a deadline for electing 6015(f) equitable relief.  However, the Department of the Treasury issued a Regulation and Revenue Procedures providing that the same two year deadline as in 6015(b) and (c) applies to 6015(f).  The United Tax Court in Lantz held this the two  year deadline is not applicable to equitable relief under section 6015(b).  The IRS has indicated that they disagree and are appealing this decision.

In cases where the IRS is denying innocent spouse relief on the basis the such claim for relief was filing untimely (later than two years after IRS first begins collection activities), the IRS is issuing IRS Form Letter 4581(c), PROPOSED DETERMINATION (Untimely Claim) – Offer to Suspend Case, offering to suspend the issuance of a determination letter denying the claim for innocent spouse relief until the 7^th circuit renders its opinion.

In most cases it is in the taxpayer’s best interest to request that the IRS suspend the issuance of the determination letter because it increases the probability that your claim will be resolved favorably without having to petition the United States Tax Court for relief.  However, in cases where it is anticipated that important witnesses or evidence will no longer be available if the matter is delayed, then the taxpayer should request that the IRS issue a determination letter immediately.  In so doing, upon receiving a determination letter the taxpayer may file a tax court petition to litigate the matter before the U.S. Tax Court.

Author:  David C. Holtz, J.D., LL.M., Former IRS Attorney 

If you have any questions, please call (310) 550-6200.

Copyright © David C. Holtz 2010.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts of text and links may be used, provided that full and clear credit is given to David C. Holtz with appropriate and specific direction to the original content at http://www.hsdtaxlaw.com/.

In a recently issued Chief Counsel Advice (CCA 200927019), the IRS stated that it can issue a levy on a taxpayer’s health savings account (HSA). What is even more interesting, in such a case, the taxpayer will be liable for a 10% excise tax on an HSA distribution to pay a tax liability, unless the distribution is made after the taxpayer becomes disabled or dies, or the payment is made after the taxpayer reaches normal retirement age.

Background:

Under IRC § 6321, when a taxpayer fails to pay a tax liability after notice and demand, a lien arises that attaches to all the taxpayer’s property and rights to property. Under IRC § 6331, the IRS is authorized to seize and sell the taxpayer’s property and rights to property subject to a federal tax lien.

An HSA is a tax-exempt trust created under state law exclusively for the purpose of paying the qualified medical expenses of an account beneficiary (e.g., an employee). The account beneficiary owns and controls the funds in his or her HSA. The account beneficiary may make a distribution from an HSA for any purpose. Any amount paid or distributed that is not used exclusively to pay the qualified medical expenses of the account beneficiary is included in his or her taxable income.

IRC § 223(f)(4) imposes a 10% excise tax on distributions not used for qualified medical expenses, unless the distribution is made after the account beneficiary becomes disabled (as defined in IRC § 72(m)(7)) or dies, or the payment is made after the account beneficiary reaches normal retirement age.

IRS Position:

Chief Counsel Advice 200927019, relying on the U.S. Supreme Court’s holding in U.S. v. National Bank of Commerce, 472 U.S. 713 (1985), first concluded that the right to withdraw funds from an HSA was a property interest that could be subject to levy.  The CCA noted that while the additional 10% tax imposed by § 223(f)(4)(A) is similar to the additional 10% tax imposed by § 72(t) on early withdrawals from a qualified retirement plan, only the latter excludes distributions on account of levy from a 10% percent tax. Under § 223(f)(4)(A), there are only three express exceptions to the imposition of the 10% tax—disability, death, or payment after the beneficiary’s normal retirement age. A levy isn’t one of those exceptions. For this reason, the CCA reasoned that the levy exception in § 72(t) wasn’t relevant to § 223(f)(4).  A levy on an HSA under IRC § 6331 isn’t a distribution to pay qualified medical expenses. Accordingly, the CCA concluded that the account beneficiary was liable for the additional 10% tax imposed by § 223(f)(4) on the amount of the levy, unless, at the time of the levy, the taxpayer had attained age 65 or was disabled.

For information call (310) 550-6200. 

By Igor S. Drabkin.   Email Igor S. Drabkin

Copyright (c) 2009 Igor S. Drabki.  All Rights Reserved.