Have you discovered during a divorce that your spouse has been committing tax fraud while you were married? Unfortunately, this now puts you in a tricky spot. You need to look after your own interest first and foremost. Those interests, though, can be confusing and may represent multiple challenges.
To help you determine what to do with this new information, consider these unexpected side effects before making any moves.
1. You May Feel an Obligation
For many people, knowing about a fraudulent activity makes them feel morally bound to tell an authority — even if your own taxes were involved. If you feel this way, the best thing you can do is to work with a qualified tax attorney to determine the best way to go about it. The IRS and state tax agencies will generally consider your good faith efforts to be honest and forthcoming, but they are not obligated to.
2. You May Be Implicated
The IRS considers anyone signing a joint tax return to be responsible for what is written on it. If your spouse under-reported income or exaggerated expenses, you are considered to be equally liable for what happened. You may even have been unwittingly involved in actual crimes. While there are some tools you can use to seek relief, these are not guaranteed.
What is guaranteed is that all your joint returns are likely to be audited if one of them shows signs of fraud. In addition, both spouses’ older individual returns (and future ones) may be subject to audit. This could take years, and it will not only be a deep dive into your own finances but also an unwanted tie to your former spouse.
Before alerting any authorities to the fraud, consult with your tax attorney — and likely an accountant — to ensure that your own taxes are as squeaky clean as possible. The better you can prove that you didn’t know about or participate in the fraud, the more likely you are to be cleared of it.
3. You May Not Get Relief
Innocent spouse relief is the best way to be stripped of liability for fraud conducted without your knowledge. But this relief is not easy to come by. First, there are statutes of limitations as to how long you have to seek the relief. These time frames can effectively be too short to relieve you of all liability.
Secondly, the IRS begins with the position that you are fully liable for the entire amount due, including penalties, and you must win them over to the idea that you shouldn’t be. There is no tried-and-true recipe to do this, so each taxpayer must come up with their own arguments, evidence, and negotiations.
4. Your Marital Assets Are Affected
If the state or federal government finds fraud, it may become very expensive. Taxpayers who can’t pay may see the IRS seek legal remedies such as seizing assets (both financial and physical property). The government even has the ability to move quickly if the agency feels that the assets could be at risk if they wait.
While you probably wouldn’t be upset if your ex’s boat is seized to pay their tax bill, remember that it will also affect your own divorce settlement, alimony, and child support amounts. The less property your spouse has, the less you can negotiate and expect to actually receive. For some couples, this will be a big factor. For others, it may not change things significantly.
Clearly, fraud committed by a spouse during the marriage raises many new problems for the innocent spouse. Your best move as soon as you discover any wrongdoing is to meet with an experienced tax attorney. There, you will get the best guidance on what to do next and how to manage the situation for your own good.
At Wiesner & Frackowiak, LC, we are ready to help. Call to make an appointment with our legal team and start finding your way out today.