“Should the spouse who has no knowledge of the ex or soon-to-be ex spouse’s business activities sign a joint individual tax return? What are the dangers in signing a joint tax return?”
Some spouses plan for their divorce by filing erroneous tax returns years in advance. By not reporting all the business income or by claiming improper business expenses, the profit of the business is reduced. The hope 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. This means that the spouse who wasn’t hiding monies or over-reporting of business expenses, may be liable for unpaid or accrued income taxes on the under reporting of the ex spouses income. If the guilty spouse has money hidden so that the IRS or the IDOR cannot find the money, 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 that are due.
Last year I met with a woman whose husband had been cheating on his income taxes for three years. 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 or investment accounts the IRS could locate with money to pay the taxes, whereas the wife had bank accounts and investment accounts with assets.
- The wife signed the joint income tax return.
The IRS then garnished the woman’s wages, placed a lien on her pre-marital real estate and levied her bank accounts.
In signing a tax return one must agree to the following:
“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.”
Maybe you believe you are protected because you have in your divorce decree or an executed income tax identification agreement drafted by the attorneys that your spouse agrees to pay all taxes owed, or that may be owed upon a tax audit. The IRS and the State of Illinois are not bound by either your divorce decree or the signed identification agreement.
We will often recommend to the innocent spouse that she should file a separate tax return rather than a joint tax return for protection of her assets.
If an innocent spouse presents a well documented case, the government may consider the granting of an innocent spouse status, which is an exception from liability. To qualify as an innocent spouse and protection from IRS collection is a complicated process. Very few innocent spouses are able to be awarded this innocent spouse status by the IRS.
If you are 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.