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Filing of incorrect form is considered a valid informal refund claim: the Ninth Circuit reverses the Tax Court and finds that the IRS was sufficiently apprised of an innocent spouse claim.

The Ninth Circuit, reversing and remanding the case to the Tax Court, held that a taxpayer was entitled to a refund of overpayments that the IRS had applied to a tax debt from a joint return she had previously filed with her ex-husband. According to the appellate court, she had made a valid informal claim for innocent spouse relief when she incorrectly filed her claim for relief on a form for requesting injured spouse relief (Form 8379, Injured Spouse Allocation), and therefore she had made a timely claim to have her overpayments refunded to her.

Facts: In 1996, Teresa Palomares filed a joint return with her husband. After separating from her husband in 2005, she filed tax returns for 2005 through 2008 using head-of-household status. Those returns all showed refunds due, but the IRS applied those refunds to an unpaid liability for the 1996 joint return. On July 1, 2008, Palomares, with free legal aid assistance, incorrectly filed Form 8379, Injured Spouse Allocation, requesting a refund of her 2007 overpayment that the IRS had applied to the 1996 joint tax liability. On Sept. 24,2008, the IRS sent her a letter stating that she did not qualify for injured spouse relief; it included Form 8857, Request for Innocent Spouse Relief, indicating that she may have intended to file that form instead.

Due to her limited fluency in English and various personal problems including abuse and threats from her husband, she did not submit Form 8857 until August 2010, when she requested refunds for 2006, 2007, and 2008. The IRS denied her request for 2006 and 2007 as untimely. She petitioned the Tax Court for relief (Palomares, T.C. Memo. 2014-243), which the court denied. Palomares subsequently appealed the decision to the Ninth Circuit.

Issues: When taxpayers file a joint income tax return, both spouses are responsible for the entire tax liability. If one spouse believes that only his or her spouse or former spouse should be responsible for all or part of the tax, he or she can request innocent spouse relief by filing Form 8857. To receive a refund based on the request, innocent spouses must file the form within the limitation period for refunds, i.e., three years from the due date of the original return (including extensions) or two years from the date that the tax was paid, whichever is later.

Another type of relief, injured spouse relief, is available for a married taxpayer filing a joint tax return when all or part of his or her portion of a refund on the joint return has been or will be applied to his or her spouse's legally enforceable debt, such as past-due federal income taxes, child support, or student loans. The married couple may file a timely Form 8379 with their joint return (or the injured spouse may file one separately), and the injured spouse may receive his or her share of the joint refund.

Both Form 8857 and Form 8379 are formal claims for relief; however, the informal claim doctrine permits an informal refund claim to be valid if it provides the IRS with sufficient notice that the taxpayer is seeking a refund. The Tax Court has held (Jackson, T.C. Memo. 2002-44) that an informal claim for relief is valid if (1) a writing is delivered to the IRS before the period of limitation expires; (2) the writing, combined with the relevant circumstances, provides adequate notice to the IRS that a claim is being filed and the basis for that claim; and (3) either the IRS considers the claim on its merits, or the taxpayer submits a formal claim before the Service rejects the informal claim.

Before the Tax Court, Palomares argued that she had made a valid informal claim when she filed the wrong form (Form 8379) on July 1, 2008, which tolled the two-year limitation period from when the taxes were paid until she filed the correct Form 8857 in 2010, and thus her request for relief was timely for tax years 2006 and 2007. The IRS argued that the submission of the incorrect form was not a valid informal claim because it did not provide sufficient information that Palomares was seeking innocent spouse relief for the 1996 tax year or a refund based on that relief.

The Tax Court held there was no valid informal claim because the taxpayer's submission of the incorrect form had not given the IRS "fair notice" of the basis of the refund claim. In reaching this decision, the court held that her submission of the injured spouse form did not provide sufficient information to notify the IRS that she was seeking innocent spouse relief and the reasons for that request; therefore, the Service could not investigate the claim and determine its merits. The court also held that the IRS's letter suggesting that Palomares might have intended to file Form 8857 and the inclusion of the form was a courtesy that could not be construed as reflecting any awareness by the Service of her intentions. Expecting the IRS to use her injured spouse form to determine whether she qualified for innocent spouse relief would place an unreasonable burden on the Service, the Tax Court held.

Holding: The Ninth Circuit reversed the Tax Court's decision, finding that the taxpayer had made a valid informal claim. According to the court, her request was sufficient to apprise the IRS that she was seeking innocent spouse relief because the IRS had been using overpayments from her separate returns to offset a liability from her 1996 joint return, so that was the only relief that made sense. Also, the court noted that the Service told her that to request innocent spouse relief, she should file Form 8857 instead of the Form 8379 she submitted. In addition, the court stated that the equities favored granting relief because the taxpayer spoke little English, was the subject of domestic abuse, was not responsible for the 1996 tax liability, and filed the wrong form due to bad advice.

* Palomares, No. 15-70659 (9th Cir. 5/31/17)

--By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota-Duluth.

Tax Matters editor Paul Bonner can be reached at or 919-402-4434.
Assets reported on estate tax returns

Returns filed in 2015. Total gross estate asset value
reported was $167.4 billion.

Publicly traded stock   $41.7 billion
Closely held stock      $14.9 billion
State and local bonds   $14.7 billion
Cash assets             $14.6 billion
Personal residence      $8.4 billion
Other real estate       $13.1 billion
Retirement assets       $10.9 billion
Other assets            $49.1 billion

Source: IRS Tax Statistics, Estate Tax Statistics, Table 1.

Note: Table made from pie chart.
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Author:Reichert, Charles J.
Publication:Journal of Accountancy
Date:Sep 1, 2017
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