In Harris v. Commissioner, T.C. Summ. Op. 2017-77, the Tax Court denied a request for innocent spouse (IS) relief to a petitioner whose wife had obtained an offer in compromise (OIC) for the liability from which he sought relief. The Court found that her OIC did not pave the road for him to obtain IS relief. Because the Harvard clinic, like most low income tax clinics, does a high number of OICs and a lesser but still substantial number of IS cases, I read the opinion with interest. I do not remember a previous case in which these two forms of relief from the collection of an assessed liability crossed paths in precisely this manner.
Mr. and Mrs. Harris got married on December 21, 2012, and continue to reside together in marital harmony at the time of the IS trial in Mr. Harris’ case. The opinion does not discuss whether the timing of their wedding sought to obtain tax benefits available from joint filing or if the timing of the wedding was somehow inextricably driven by factors other than tax. They timely filed their 2012 return (already I am pulling for them – this fact alone makes them an unusual couple to be discussing on the electronic pages of PT.) In 2012, Mr. Harris received wages of $3,877 and non-employee compensation of $3,074 while Mrs. Harris netted $71,784 from three Schedule C businesses. Though they timely filed and made some remittance, they still owed $4,295 of the taxes reported on their return. Both husband and wife participated in filing the return and both knew that their taxes were not fully paid.
In subsequent years, they continued to timely file their returns and Mrs. Harris continue to earn the lion’s share of the family income from her Schedule C businesses. For the year 2013, Mrs. Harris failed to report about $45,000 she received from a distribution from a retirement account. This resulted in an additional assessment for that year. Mrs. Harris also brought into the marriage unpaid taxes for several years. She owed taxes for failure to remit, and she had entered into and defaulted on installment agreements during those years because she continued to fail to make estimated payments.
She decided to request an offer in compromise. Mr. Harris knew about her decision. She submitted an offer for the years 2007 through 2012 (the year of their first joint return.) After some back and forth, the IRS accepted her OIC for a lump sum payment of $7,458 on April 14, 2014. It’s hard to make informed decisions based on limited information but I am shocked that the IRS accepted an offer of this amount given that her 2012 income was $71,784 and her 2013 income was $106,410. Her monthly income leading up to the OIC would have been almost $9,000. Even though she may have had no assets, I would have expected her reasonable collection potential to be approximately $3-5,000 x 12. I am not sure if I want to start having my offers worked in Memphis, send my offers out to whoever prepared hers, or both. Despite my surprise at the amount of the offer, the fact is the IRS accepted it and it may have been a great deal for the IRS for all I know.
The OIC only covered Mrs. Harris and did not cover Mr. Harris. He came to regret this fact and he became very interested in obtaining an OIC himself. He filed doubt as to liability OICs in the four consecutive months of October 2014 through January 2015. The IRS denied each of the OICs, stating that he did not raise an “issue regarding the accuracy or correctness of your tax liability.”
In March of 2015, he took a different tack and filed a request for IS relief. He put in this request that Mrs. Harris should have included him in the OIC she submitted. The IRS denied his request for relief and he filed a Tax Court petition. Mrs. Harris chose not to intervene. Because this is an underpayment case, Mr. Harris needs to obtain relief under IRC 6015(f). The Court looked at Rev. Proc. 2013-34 and the seven conditions listed there. While noting that the factors do not bind the Court, it went through them and found two did not favor relief and five were neutral or weigh slightly against relief. Additionally, the Court pointed out that Mr. and Mrs. Harris left income off their 2012 (his) and 2013 (hers) returns.
Mr. Harris argued that it would be inequitable to hold him liable for the 2012 liability because he should have been included on the OIC. After looking at the circumstances, the Court determined that he was not entitled to 6015(f) relief. The failure to include him on the OIC did not result from fraud or deceit on the part of either Mrs. Harris or the IRS. While it was unclear why he was not included, the failure does not form the basis for IS relief. The result is logical. If he wanted to be on his wife’s OIC, he should have affirmatively taken steps to make it happen. Even if 2012 got added to the OIC at the last minute, the failure to include him does not form the basis for relief through the IS process.
The Court described the four OICs he submitted as being doubt as to liability OICs. Perhaps he should seek to file a doubt as to collectability OIC instead. Mrs. Harris income continues to be relatively high and that may prevent him from obtaining an OIC, but his chances seem better in the collectability realm and non-existent on the liability front. The case points to the need for spouses to coordinate their efforts to obtain relief from the IRS. It is not unusual for one spouse to need relief for liabilities existing before the marriage or separate liabilities during the marriage. In seeking that relief, the spouses need to talk to each other and to professionals. It may be that they need to talk to separate professionals because their interests do not perfectly align. Here, the failure to properly set up her OIC leaves him holding the bag for a liability created by her income. This is both an unfortunate and an avoidable result.