Should the spouse who has no knowledge of the ex or soon-to-be ex spouse’s business activities sign a joint tax return? What are the dangers in signing a joint return?
Some spouses plan for their divorce by filing erroneous tax returns years in advance, and intentionally report decreased business income. By not reporting all the business income or by claiming improper business expenses, the profit of the business is reduced. The goal is to pay less taxes, and possibly reduce their spousal support obligations.
When the Internal Revenue Service or the State of Illinois discovers the unreported income and/or improper business expenses, the taxing agencies will hold both spouses “jointly and severally” liable for the under-reported income taxes as well as any tax penalties associated with the under-reporting. This means that the spouse who wasn’t hiding monies or over-reporting business expenses may be liable for unpaid or accrued income taxes on the under-reporting of the ex-spouse’s income. If the guilty spouse has money hidden so that the IRS or the IDOR cannot find it, then the IRS and the IDOR will take the money from the innocent spouse’s bank accounts.
Unfortunately, the guilty ex-spouse who is hiding assets can burden the innocent spouse with 100% of the income-tax responsibility for the taxes now due.
Last year, I met with a woman whose husband had been cheating on his income taxes for three years. When the husband’s business was audited by the IRS, the woman was told by an IRS collections officer that she owed $220,000. The reasons were as follows:
- The IRS audited her husband’s business tax return and found unreported income.
- The husband had no bank accounts the IRS could locate with funds, or investment accounts to pay the taxes, whereas the wife had bank accounts and investment accounts with assets.
- The wife signed the joint income tax return.
The woman’s husband told her not to worry, and that it was a mistake.
The IRS then garnished the woman’s wages, placed a lien on her pre-marital real estate, and levied her bank accounts. The IRS was taking money from her paychecks and her bank accounts in order to pay the tax debt created because of the ex husband’s business.
Most people do not realize that when they sign a tax return there is, in small print, the following phrase: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
You might believe you’re protected because your Divorce Decree, or an executed income tax identification agreement drafted by the attorneys, states that your spouse agrees to pay all taxes owed or that may be owed upon a tax audit. Unfortunately, the IRS and the State of Illinois are bound by neither your Divorce Decree nor the signed tax identification agreement, so you are not protected.
We will often recommend to the innocent spouse that he or she should file a separate tax return rather than a joint tax return for protection of his/her assets.
If an innocent spouse presents a well-documented case, the government may consider the granting of “innocent spouse status”, which is an exception from liability. Qualifying as an innocent spouse and protection from IRS collection is a complicated process, and the IRS awards innocent spouse status to very few people.
If you’re in a shaky marriage and you believe that your spouse or soon to be ex-spouse is improperly reporting his taxable income from his business, do not sign a joint tax return.
Larry Goldsmith is a member of the CJBS Financial Group’s litigation, asset protection and tax practices team. Larry has developed asset protection programs that provide tax and creditor protections for high net-worth individuals and closely held business owners. He is also regularly retained as an expert witness for a variety of issues in both federal and state court matters. To reach Larry call (847) 945-2888.