Res Judicata and the Innocent Spouse Defense

IRS clarifies regulations governing when res judicata will be applied in cases of innocent spouse relief

Courts are busy places. There are great demands on their time and therefore, efficiency and economy are highly regarded. One fundamental element of American jurisprudence is that parties are generally not allowed a "second bite at the apple." In other words, if you have a claim in court that is adjudicated to completion, you are typically not permitted to relitigate that claim in another court.

This concept is known by the Latin legal phrase, "Res Judicata" which means, "the matter judged." It is used to promote finality in litigation and preserve the resources of the courts to be used for other litigants.

The Internal Revenue Service has recently issued new guidance on the application of res judicata to innocent spouse relief. When the Service determines a delinquency or other issue requiring the payment of additional tax, and/or penalties and interest, innocent spouse relief can be requested by a spouse who had nothing to do with the faulty tax return at question.

Innocent spouse

This relief is important, in that a joint income tax filing makes both parties "jointly and severally" liable for all tax deficiencies. If one spouse routinely files the taxes, the other spouse may not fully understand how their spouse calculated the tax or the refund and may not have any specific knowledge of the couple's finances.

In such situations, the IRS will grant relief to the "innocent" spouse and allow him or her to avoid the liability of their spouse for the tax deficiency. This new guidance provides more information on how the IRS will handle these cases and additional examples of acts by taxpayers to be considered in assessing the granting of this relief.

Res Judicata

Under these proposed rules, relief can be granted if the spouse did not "meaningfully participate" in the prior court proceeding, and, therefore, res judicata does not apply. In many of these cases, the explication of the phrase "meaningfully participate" will be significant, and the Service provides in these new regulations a non-exclusive list of relevant acts.

For an innocent spouse, it will be important to have an experienced tax attorney who can assemble a compelling explanation of the facts and circumstances that warrant relief.

In the non-exclusive list of examples, it is important to note that no single act is more important and the significance of any particular act will vary depending on the totality of the circumstance of the individual taxpayer.

The Service highlights that meaningfully participate is related to cases where you could have requested innocent spouse relief, not merely a case where you could have disputed the deficiency.

The IRS also states that it will consider evidence of domestic violence "abuse" when evaluating the question of meaningful participation.

Relief from tax is proportional

It also important to note that the IRS, while it will allow equitable relief for an innocent spouse if that spouse genuinely still owes tax due to underpayment, the innocent spouse remains liable for the interest and penalties that are allocated to that portion of the underpayment.

If you have been blindsided by your spouse and are now enmeshed in deficiency proceedings demanding payment of delinquent taxes, penalties and interest, you need to quickly respond to the IRS, and an attorney at the Tax Litigation Law Office of Scott Kauffman can help you understand both what has happened and how to effectively respond.