Divorce and I.R.S. Trouble for the Innocent Spouse
by Larry Goldsmith, CPA, J.D., M.A.F.F. As a Financial Forensic CPA traveling down the road of hidden assets and hidden income, I often observe bad behavior meant to intentionally punish a former spouse. More than once, I have seen fear in the eyes of an innocent spouse who simply signed her name to a joint tax return and is now being relentlessly pursued by the Internal Revenue Service collection division. We all know how this happens; in preparation for a separation or divorce, some spouses seeking a better settlement will decrease their business profits by diverting income or by claiming improper business expenses. The trouble for the innocent spouse who has agreed to file a joint income tax return before or during the separation is that when the Internal Revenue Service or the State of Illinois discovers the unreported income, the taxing agencies will hold both the innocent and guilty spouse ‘jointly and severably’ liable for the under reported income taxes, tax penalties, and accrued interest. ‘Joint and severably’ liable simply means that the Internal Revenue Service will take the money from either spouse, without concern as to fairness. Unfortunately, it is often the case that the guilty party who is hiding assets will allow the innocent spouse to be burdened by paying 100% of the tax debt. Last year a woman was referred to me. Her husband of three years was cheating on his income taxes and his business was audited by the IRS. The young woman was told by an IRS collections officer that since she filed a joint tax return she owed $220,000. The IRS garnished her wages, placed a lien on her pre-marital real estate and levied her bank accounts. Her husband told her it was a mistake and “not to worry”. How can you be protected? Both the Internal Revenue Service and the State of Illinois recognize that there are innocent spouses who:
- Filed a joint income tax return not knowing the guilty spouse failed to report on the income tax returns, gross income, deducted improper deductions, or took improper tax credits.
- The innocent spouse, like a reasonable person in a similar circumstance, would have not known of the under reporting. The government will consider the innocent spouse’s education, business experience, the nature of the under reporting and the individual’s financial condition.
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