| In Divorce, potential tax liability can frequently become | | | | realization that a spouse is a tax cheat - and you |
| the tool for one spouse to use against the other | | | | were completely unaware until the divorce. |
| spouse. If improperly used, this tool can destroy all of | | | | The Potential Problems: |
| the marital assets. In the worst case, tax liability can | | | | - You may end up owing the IRS half the overdue |
| seriously impact the future financial security of either | | | | taxes. |
| spouse and subject them to criminal sanctions. | | | | - You may end up owing the IRS the ENTIRE tax bill. |
| Situation 1 - Your Spouse Owns a Business | | | | - The overdue tax bill may be double the actual unpaid |
| The most common situation where taxes become an | | | | taxes, due to penalties, fines, and interest. |
| issue in a divorce is they there is a family business. | | | | The Potential Solution: |
| The owner - spouse may have hidden cash receipts | | | | The IRS has a provision called Innocent Spouse Relief. |
| or engage in a practice of recording inflated expenses. | | | | This provision gives complete or partial tax forgiveness |
| This common practice by many business owners is a | | | | to an innocent spouse. But be aware - the definition of |
| fraudulent attempt to minimize taxes. The other | | | | "innocent" is technical, elusive, and difficult to |
| spouse is often aware of and approves of this | | | | understand. |
| practice. During the marriage, minimization of taxes | | | | Two available forms of tax relief: |
| results in higher household income and a better lifestyle | | | | - Innocent Spouse Relief - Discharge of Liability |
| for the couple. | | | | - Separate Tax Liability for Each Spouse |
| This practice is illegal or borders on illegal. During the | | | | The first form of relief wipes out your tax debt in part |
| marriage it is a secret between the married couple. But | | | | or full. You must have not had any knowledge of the |
| during a divorce each spouse may try to use past tax | | | | incorrect or fraudulently prepared tax returns. That |
| behavior to gain an advantage. The owner - spouse | | | | means you cannot look like you were aware of any |
| wants to minimize past income in an effort to lower | | | | part of the return. Also, you must not have benefited |
| child support, alimony, or division of marital property. Of | | | | from the hidden income. That means you cannot be |
| course the other spouse wants to prove the opposite. | | | | driving a Mercedes and at the same time signing a tax |
| The result is a game of chicken - with one spouse | | | | return that show $200/week in income. |
| threatening to turn the other spouse in to the IRS. This | | | | The second form of relief is slightly easier to get. If you |
| is a dangerous game for all involved. Do it yourselfers | | | | qualify, the IRS will separate out the tax liability of your |
| will find the situation blowing up in their face. People | | | | income from your spouse's hidden income. This type |
| with attorneys may find the attorney reluctant to deal | | | | of relief may have the effect of wiping out extreme |
| with the situation. | | | | tax bills and penalties. |
| The Potential Problems: | | | | The Bottom Line: Always be aware of these types of |
| - Your Attorney cannot assist the owner/spouse | | | | tax situations. The financial effect can be far worse |
| commit the crime of tax evasion. | | | | than the divorce. If you believe this type of problem is |
| - The non-owner spouse may end up liable for half of | | | | in your future, start preparing immediately. Do not sign |
| the back taxes, penalties, and fines. | | | | a joint tax return for your upcoming tax filing. File |
| - The divorce court Judge may decide to turn | | | | married-filing-separately. The moment you suspect a |
| everyone in. | | | | potential tax liability, begin to separate your financial life |
| - In an extreme situation, everyone can go to jail. | | | | from your spouse's financial life and then promptly file |
| Situation 2 - You Make a Surprise Discovery: Your | | | | for divorce. |
| Spouse is a Tax Cheat | | | | Copyright 2006 The Divorce Center P.A. |
| Another common situation in divorce: the sudden | | | | |