Innocent Spouse Relief

Posted on by katemley

IRC 6015 (c) 


The United States Tax Court in Smith (Petitioner) and Hodge (Intervenor) v. Comm’r of Internal Revenue Service, Docket No. 372-23S, filed June 12, 2025, agreed with the Petitioner and the IRS in a rare case of review associated with a non-requesting spouse’s objection to provision of Innocent Spouse relief. The relevant tax period is 2017. However, the return was filed in July 2021. The return was prepared by Petitioner, wife. The couple legally separated in October 2021. Petitioner had W-2 income. Intervenor husband had W-2 income, 1099 income and cancelled debt income. Neither of the last two items were included on the return, so the IRS later issued a notice adjusting the liability. It was after this that Petitioner filed for Innocent Spouse relief under IRC 6015(c). Under this type of relief, the requesting party can have the liability limited to their income only. This particular provision states that relief is not available if the requesting spouse “had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual…” In this case, the IRS agreed that requesting spouse should receive relief. However, the Intervenor (husband), submitted a response indicating that Petitioner must have been aware of the unreported income because she prepared the return and had access to his bank account, so she could not have been “completely oblivious,” as he stated it. The Court deemed his testimony to be self-serving and unverified. During the relevant period, the parties lived apart. The 1099 for self-employment and cancelled debt were addressed to the husband, Intervenor. The 1099 income was deposited into his sole account. Furthermore, the Court pointed out that throughout their marriage they always maintained separate bank accounts. Relief was granted to Petitioner because of the inability to meet the burden of the statute. 

Civil Fraud Penalty

Posted on by katemley

IRC 6663


The United States Tax Court in Remus Beleiu and Naomi J. Beleiu v. Comm’r of Internal Revenue, Docket No. 16518-19, Filed July 2, 2025 ruled that the IRS had carried its burden to prove civil fraud against Mrs. Beleiu and therefore she would incur $100,000 of fraud penalties. The taxpayers are a married couple. It appears that Mr. Beleiu owned two separate businesses – an IT business and a consulting business. Mrs. Beleiu is a financial analyst for a Hospital System. She has an undergraduate degree in accounting and an MBA with a concentration in accounting. She self-prepared the returns. While her education was a factor, other actions she took mattered a good deal to the Court. Three tax periods were picked for Exam. Mrs. Beleiu attended an office conference with the Examiner without representation, and without many documents requested. In particular she excluded all documentation from one business. The Examiner set another appointment and though the taxpayer appeared, she still did not present information requested. At that point, Exam subpoenaed bank records from two banks and performed a deposit analysis. While it was clear that the Schedule C from the first business, (there was no Schedule C’s filed for the second business), didn’t reflect enough gross revenue as compared to 1099-Misc’s and 1099-K’s, it became apparent to the Examiner was that there were other bank accounts referenced on bank statements associated with another business owned by the taxpayers. Prior to issuing a report, the IRS had a third meeting, with newly hired counsel and accountants for the taxpayer. At that meeting the IRS attempted to reconcile the bank statements with the documents provided by the taxpayer and their representatives. This failed because Mrs. Beleiu had not disclosed the existence of all bank accounts, or the second business. The opinion proceeds to review the 11 badges of fraud. Two factors were neutral, or against the fraud determination – that the taxpayer had not filed a return, and that the taxpayer operated an illegal business. Nine factors weighed against taxpayer: understating income, keeping inadequate records, giving implausible or inconsistent explanations of behavior, concealing income or assets, failing to cooperate with the tax authorities, supplying incomplete or misleading information to a tax return preparer, providing testimony that lacks credibility, and dealing in cash. It certainly didn’t help the taxpayer’s case for her to testify that she didn’t really hide the other business, since providing bank statements that showed transfers to that businesses’ accounts were provided! 

Penalty Abatement: Reasonable Cause 

Posted on by katemley

IRC 6724


While the taxpayer failed to succeed on its reasonable cause arguments for abatement of penalties in Dealers Auto Auction of Southwest LLC v. Comm’r, at T.C. Memo 2025-38, filed April 28, 2025, the case provides some insight regarding IRS denials of abatements based on nondelegable duty arguments.  This practitioner has had many information return penalty cases over the past few years, so it is not surprising to see a case related to a penalty associated with filing an information return. In this case, the return at issue was a Form 8300 which is required to be filed to report cash payments received by a trade or business when the cash payment is over $10,000.  The taxpayer regularly sells automobiles through an auction house and regularly receive over $10,000 cash payments from buyers.  The case explains all of their processes and filings.  Unfortunately for the taxpayer, they had a bumpy filing history.  They seem well aware of the requirement to file, but for a variety of reasons, could not completely comply.  Of interest in this summary is the Court’s commentary on the IRS position that the duty to file an information return is a nondelegable duty and thus essentially no abatement of penalties can be had.  The Court found the IRS’s argument to be “unpersuasive.” The taxpayers in this case had some facts associated with reliance on software.  The IRS argued that even if the taxpayer relied on software, it would not qualify for reasonable cause because the duty to file information returns is not delegable.  While the taxpayer ultimately failed to obtain relief, the Court made an effort to illustrate that the IRS conclusion was incorrect.  The Court stated that software malfunctions can qualify as a failure beyond the filer’s control when it is shown the taxpayer used the software correctly.  Additionally, there is no preclusion in Treasury Regulation Section 301.6724-1(c)(1)(ii) to find that a software malfunction could be a failure beyond the filer’s control, and further, the Internal Revenue Manual provides at 20.1.7.12.1(24) that failures related to software and hardware can be failures beyond the filer’s control for purposes of a reasonable cause defense. It may take effort, but the point of this is that it is possible to overcome the U.S. Supreme ruling of United States v. Boyle, 469 U.S. 241(1985) that is the IRS go to for the premise that a taxpayer cannot be excused for timely filing by relying on an agent. 

Passports & Tax Debt

Posted on by katemley

IRC 7345


Affecting a taxpayer’s passport is a powerful tool to force filing and payment compliance, in many instances.  The Tax Court in Pfirrman v. Comm’r, filed March 18, 2025 at T.C. Memo 2025-22 walks us through the analysis.  This particular taxpayer was attempting to inappropriately challenge his underlying liability. But the case details how a passport can be used to motivate taxpayers to comply with filing and paying requirements.  This practitioner has dealt with many clients who have a high level of interest in meeting the statutory goals of IRC 7345.  Under this Code provision, if the Commissioner certifies that a taxpayer has “seriously delinquent tax debt,” then that certification is transmitted to the Secretary of State for action with respect to denial, revocation, or limitation of the taxpayer’s passport. Generally, a seriously delinquent tax debt is a federal tax liability that has been assessed, exceeds $64,000 (2025 inflation adjusted), and is unpaid and legally enforceable.  It should be kept in mind that it is entirely possible to either avoid certification, or have a taxpayer decertified as seriously delinquent, even if they owe over this amount, if they move into a compliant filing and paying status. In other words, once on a valid installment agreement, partial payment installment agreement, or placed into Currently Not Collectible, a taxpayer will no longer be deemed seriously delinquent, no matter how much they owe.  Much of the remaining part of the opinion was an explanation by the Court of the limitations of their jurisdiction under the statute. The Court may reverse certification if it is erroneous, or determine whether the IRS has failed to reverse the certification.  Should the Court find such facts to exist, it is limited to ordering the Treasury Secretary to notify the Secretary of State of such determination.  The Court lacks any further power.  In sum, find a compliant outcome and the matter will automatically be decertified to the Department of State.