201601.22
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Tax Crimes, Divorce & Innocent Spouse – Divorce Tax Lawyers | Golding & Golding

Golding & Golding - U.S. and International Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

It is not uncommon for divorcing couples to want to completely separate from each other in all aspects of their lives. Unfortunately, this can become very complex when it involves US and foreign tax.

If one spouse determines that the other spouse was involved in tax fraud during the marriage, certain actions may be required to be taken to avoid large fines, penalties and even criminal prosecution for the non-fraudulent spouse.

                            

Married Filing Jointly

Married filing jointly is one of those concepts that does not impact a person’s thought process usually until something jarring occurs — such as legal separation or divorce. It is relatively commonplace for married couples to file Married Filing Jointly (MFJ). Why? Because filing MFJ provides a married couple with the best tax benefits.

Generally, when a couple files MFJ they will receive the lowest tax rate as, opposed to if the couple was filing MFS (Married Filing Separate). In fact, the IRS is promoting MFJ filings by providing numerous additional benefits as well as penalizing married couples who do not file MFJ (MFS filing has extensive limitations on certain deductions that are otherwise available to couples filing MFJ).

                            

Joint Liability – Married Filing Jointly

When a couple files a married filing joint tax return, that means that their filing one tax return together to include all of their income and deductions. This can become a major issue at a future date and time when one of the spouses learns that the other spouse may have been committing tax fraud during the marriage and the spouses filed MFJ.

Tax fraud comes in all shapes and sizes; it could include the willful failure to report certain income, embellishing certain deductions, making up fake deductions, hiding income or assets overseas, and/or several other versions of tax fraud.

Since the tax return was filed MFJ, that means that both parties are on the hook for the liability or fraud. This is different than if spouses filed Married Filing Separate, which means that the spouses are each filing their own individual tax return.

                            

Taking Action to Protect Yourself

If you find yourself in the difficult position of having a fraudulent spouse in which you filed a joint tax return for the year’s issue is important that you speak with an experienced tax attorney to evaluate your situation and determine the best strategy for moving forward.

If the failure to report involves foreign accounts there is the heightened scrutiny under FATCA (Foreign Account Tax Compliance Act) and other international tax laws designed to punish willful tax evaders with unreported foreign accounts and unreported foreign income

The following is a summary of Innocent Spouse:

 

Innocent spouse is a term used when the IRS is seeking to enforce tax debt against both spouses, but one of the spouses is innocent. When one spouse is innocent of the tax fraud, they should consider filing an “Innocent Spouse” application to try and receive protection or “amnesty” from prosecution.

For example, it could be the situation were prior to the spouses being married one of the spouses of large tax that or other IRS issue that he or she did not disclose to the other spouse.

Alternatively, it could also be that while the parties are married one of the spouses committed an act in which the other spouse is being penalized for by the IRS.

Does Innocent Spouse Work?

Under IRS tax if one spouse committed an act, BUT the parties filed together as married filing jointly, then the IRS sees those tax returns as “one tax return” and can therefore can go after both spouses even though only one spouse is guilty of tax crime.

If the IRS accepts the non-guilty spouse’s innocent spouse application, then the IRS will only go after the guilty spouse for the tax liability. If you find yourself in a position where the IRS is coming after you for a tax crime you did not commit, it may be worth pursuing an innocent spouse application to try to get relief from tax liability and criminal prosecution.

                                            

Married Filing Jointly

Most married couples will file their tax returns as married filing jointly. The reason is married filing jointly provides the best tax benefits for taxpayers. To that end, when two spouses file married filing jointly, they are filing as “One Joint Unit.” This means that both spouses are on the hook for all the information that is contained – or missing – from the tax return. In other words, if the spouses file Married Filing Jointly and one spouse commits tax fraud, then the other spouse two is going to be just as liable for tax fraud if the fraud stems jointly file taxes.

While this is obviously not fair, it is crucial that the innocent spouse protect himself or herself from future investigation, audit or prosecution from the IRS.

                                            

What can the innocent spouse do?

As provided by the Internal Revenue Service:

Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse.

In some cases, a spouse will be relieved of the tax, interest, and penalties on a joint tax return. Three types of relief are available.

  1. Innocent spouse relief.
  2. Separation of liability.
  3. Equitable relief.

This article explains these types of relief, who may qualify for them, and how to get them. Each type of relief has different requirements. They are explained separately in different parts of this article. Read each part to see if you qualify for that type of relief.

Table 1 compares the rules for these three types of relief. You may also want to see Questions & Answers for a list of questions and answers about these types of relief.

You are not required to figure the tax, interest, and penalties that qualify for relief. The IRS will figure these amounts after you file Form 8857, Request for Innocent Spouse Relief.

                                            

Innocent Spouse Relief

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse (or former spouse).

The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount. But if you wish, you can figure it yourself. See How To Allocate the Understatement of Tax, within the Publication 971.

You must meet all of the following conditions to qualify for innocent spouse relief.

  1. You filed a joint return which has an understatement of tax due to erroneous items (defined below) of your spouse (or former spouse).
  2. You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax (SeeActual Knowledge or Reason To Know,defined below). 
  3. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. (SeeIndications of Unfairness for Innocent Spouse Relief, later).
  4. A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

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Relief by Separation of Liability

Under this type of relief, you allocate (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). The understatement of tax allocated to you is generally the amount for which you are responsible.    See How To Allocate the Understatement of Tax, within Publication 971

This type of relief is available only for unpaid liabilities resulting from understatements of tax. Refunds are not allowed.

To request relief by separation of liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857.

  • You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)
  • You were not a member of the same household (explained next) as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.

Members of the same household.   You and your spouse are not members of the same household if you are living apart and are estranged. However, you and your spouse are considered members of the same household if any of the following conditions are met.

  1. You and your spouse reside in the same dwelling.
  2. You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other’s household as explained in (3) below.
  3. Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse’s return. Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education.

                                             

Equitable Relief 

If you do not qualify for innocent spouse relief or separation of liability, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief.

If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If you request any of these types of relief, and the IRS determines you do not qualify for any of them, the IRS will consider whether equitable relief is appropriate.

Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax (defined below)  or an underpayment of tax. An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2009 return shows that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.

                                               

Understatement of Tax

An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.

                                               

Conditions for Getting Equitable Relief

You may qualify for equitable relief if you meet all of the following conditions.

  1. You are not eligible for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law.
  2. You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
  3. Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. SeeTransfers of Property To Avoid Tax, earlier, under Relief by Separation of Liability.
  4. You did not file or fail to file your return with the intent to commit fraud.
  5. You did not pay the tax. However, seeRefunds, later, for situations in which you are entitled to a refund of payments you made.
  6. You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. SeeFactors for Determining Whether To Grant Equitable Relief, later.
  7. The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies:
  8. The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.
  9. If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.
  10. You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).
  11. You establish that you were the victim of abuse before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.
  12.      You established that your spouse’s (or former spouse’s) fraud is the reason for the erroneous item causing the understatement of tax.

                                     

If you are considering making an Innocent Spouse application to the IRS, you may consider speaking with an experienced IRS Tax Litigation/Tax Controversy Attorney first.