The Treasury Inspector General of Tax Administration (TIGTA) recently released an audit report titled “Most Employers Paid Their Deferred Social Security Taxes but Some Penalties Were Incorrect” (Report No. 2025-406-049, issued Aug. 27, 2025).

The COVID-19 pandemic brought an array of tax relief measures, including the option for employers to defer the deposit and payment of the employer’s share of Social Security taxes. This relief, authorized under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was a lifeline for many businesses and self-employed individuals. But as the dust settles, a recent audit by TIGTA reveals that while most employers met their obligations, some were hit with penalties that should not have been assessed.

Social Security tax deferral specifics

Under the CARES Act, employers and self-employed individuals could defer the deposit and payment of the employer’s share of Social Security tax for wages paid between March 27 and Dec. 31, 2020. The deferred amounts were due in two installments: half by Dec. 31, 2021, and the remaining half by Dec. 31, 2022. The IRS provided clear guidance and set up special procedures to help taxpayers comply with these conditions.

Most employers paid but some were still penalized

TIGTA’s audit, released in August 2025, reviewed how employers handled their deferred Social Security tax payments and how the IRS processed those payments and assessed penalties. The good news is that the vast majority of employers paid their deferred taxes on time. This is a testament to the resilience and diligence of the business community and their advisors.

However, TIGTA found that some employers were incorrectly assessed penalties even when they paid on time or made good-faith efforts to comply. In some cases, the IRS’s systems did not properly recognize payments as being for deferred taxes, or payments were misapplied. As a result, some businesses received penalty notices for late payment or underpayment, even though they had followed the rules.

Why were these errors made

The IRS had to quickly adapt its processing systems to accommodate the new deferral provisions. Because of the rapid implementation, some payments were not properly matched to the deferred tax liabilities, especially when payments were made through different channels or with incomplete payment information. In other cases, the IRS’s automated systems defaulted to penalty assessments when they could not immediately reconcile a payment.

Steps to take for an erroneous penalty notice

If you or your client deferred Social Security taxes and received a penalty notice, don’t panic. Here’s what you should do:

1. Gather documentation and collect proof of payment. These include bank records, IRS payment confirmations and correspondence.
2. Review the notice carefully, by checking the dates and amounts. Compare these to the internal records of the deferred tax payments.
3. If the penalty was assessed in error, request abatement. The IRS has procedures for removing penalties that were incorrectly assessed due to payment misapplication or system errors (§6404(a)). Abatement of erroneous assessments can be initiated by IRS corrections or by filing Form 843, Claim for Refund and Request for Abatement. No showing of reasonable cause is required when the penalty is erroneous due to IRS or system error.
4. You may call the IRS or use the IRS penalty relief page for more information.

Final thoughts

The IRS and TIGTA are working to resolve these issues, but it’s important for both business owners and tax professionals to stay vigilant. If you deferred Social Security taxes during the pandemic, review your records and IRS notices. If you spot an error, act quickly to resolve it. With good documentation and proactive communication, you can ensure that you and your clients are not unfairly penalized.

If you have questions or need help, don’t hesitate to reach out to your tax professional or the IRS. Staying informed and engaged is the best way to protect your interests and keep your tax matters on track.

Innocent spouse relief under §6015 can be a lifeline for taxpayers saddled with liabilities caused by a spouse or former spouse. However, as the U.S. Tax Court recently reminded us in Lisa Marie Walsh v. Commissioner, this relief isn’t automatic. On Aug. 26, 2025, the court ruled that Walsh was still responsible for part of the taxes and penalties she and her ex-spouse had accumulated over six years. The court’s decision highlights both the limits of innocent spouse relief and the importance of careful client counseling.

Case background: Why one taxpayer was denied innocent spouse relief

Walsh’s story is one that many practitioners have heard before. Lisa said she didn’t understand the tax returns her then-husband filed and claimed she was unaware of the large tax liability until 2020, well after the couple’s divorce. When she asked the court for innocent spouse relief, Lisa hoped to shed responsibility for those liabilities. Unfortunately for her, the court found her case didn’t meet the standards necessary for relief under §6015.

Why res judicata blocked innocent spouse relief in this case

The court first addressed whether Walsh could seek relief for tax years 2011-2013. Under res judicata, she did not qualify. This legal doctrine prevents a taxpayer from relitigating issues that were, or could have been, addressed in a prior case. Though Walsh hadn’t specifically requested innocent spouse relief in the earlier case, her husband and attorney participated. The court noted that she had meaningful participation through her attorney. As a result, Lisa was not granted relief for those years because she was aware of the previous tax litigation and received representation in those cases.

This is a critical reminder for tax professionals: once a taxpayer has been through litigation involving the same liabilities, res judicata may close the door on future innocent spouse claims. Practitioners must carefully evaluate prior proceedings before advising clients to pursue relief.

The equitable relief framework

In the remaining three years, 2014-2016, Walsh wasn’t barred by res judicata, so the court applied the equitable relief framework under Revenue Procedure 2013-34. This framework looks at multiple factors, none of which is determinative by itself, but together help the court weigh fairness.

Key factors included:

• Marital status: Being divorced is a factor in her favor.
• Economic hardship: Walsh did not demonstrate that paying the liability would create genuine financial hardship.
• Knowledge of liabilities: The court found she had actual or constructive knowledge of the underpayments.
• Benefit received: Walsh continued a lavish lifestyle even as the tax debt accumulated.
• Post-divorce compliance: Her compliance record after the divorce weighed against her, as she failed to meet her tax obligations consistently.

In balancing these elements, the court concluded that only her divorced status worked in her favor. The remaining factors weighed strongly against granting relief.

Why innocent spouse relief failed

Ultimately, the court ruled that Walsh had not met her burden of proof for equitable relief under §6015(f). The decision came down to credibility and lifestyle. Walsh’s continued enjoyment of the benefits of underpaid taxes, coupled with her knowledge of the liabilities and lack of hardship, undermined her case.

This reinforces a tough reality: being divorced and claiming ignorance is rarely enough to qualify for innocent spouse relief. Courts want compelling evidence of unfairness, such as an abusive relationship that prevented access to financial records, or circumstances showing genuine economic harm would result if relief is denied. Walsh’s case lacked those elements.

Lessons for practitioners

For tax professionals advising clients, the Walsh case delivers several essential takeaways:

1. Check prior proceedings carefully. If a client participated in earlier litigation involving the same years, res judicata may bar relief. Even indirect participation through an attorney can be enough to close the door.
2. Evaluate the equitable relief factors thoroughly. Divorced status alone won’t win a case. Practitioners should walk clients through each factor in Rev. Proc. 2013-34 and assess the overall balance before pursuing relief.
3. Document hardship and lack of knowledge. Courts require clear, persuasive evidence. Clients must show how they were kept in the dark about liabilities, or how paying would cause real financial strain. Simply asserting ignorance or discomfort with tax forms is not sufficient.
4. Address lifestyle and benefits received. If a client benefited from underpaid taxes, such as through a comfortable lifestyle, the court will likely weigh that factor heavily against them. Practitioners should be prepared to counter this with evidence of unfairness or other mitigating circumstances.
5. Stress post-divorce compliance. A taxpayer’s behavior after the divorce matters. Consistent filing and payment history can strengthen claims of good faith. Conversely, continued noncompliance can sink a relief request.

Don’t assume divorce equals relief

Innocent spouse relief cases often involve emotionally charged situations. Clients may feel betrayed, overwhelmed or unfairly punished for a partner’s financial decisions. As tax professionals, we must balance empathy with a clear-eyed assessment of the law. The Walsh case underscores the difficulty of obtaining relief without strong, documented evidence. It also shows the importance of managing client expectations. Many taxpayers believe divorce alone entitles them to relief, but the courts demand much more.

Closing thoughts

The tax court’s decision in Lisa Marie Walsh v. Commissioner is a cautionary tale for taxpayers and practitioners alike. Innocent spouse relief under §6015(f) is possible, but it is far from automatic. Res judicata can bar relief for years already litigated, and for later years, the equitable relief framework requires compelling evidence across multiple factors. Guide clients honestly, document everything and set realistic expectations. Relief is available, but only in cases where the balance of evidence supports fairness. Without that, as Walsh discovered, the court will not hesitate to deny the request.

Question: Bethany is a tattoo artist who regularly receives tips from clients in addition to set service charges. Under §70201 (“No Tax on Tips”) of the One Big Beautiful Bill Act (OBBBA), are these tips eligible for the deduction?

Answer: No. Bethany’s services fall under tattoo services, which are categorized as health services in many regulatory frameworks (state and local health departments classify them as body art/health services). These services are explicitly excluded from the occupations covered by §70201. Therefore, even though tattoo artists consistently receive tips like bartenders or hair stylists, their work is categorized as a health service, which is not eligible for the §70201 deduction.