Wealth Pilgrim: Money Management Advice, Financial Stress Management, & Resources

Innocent Spouse Married A Tax Cheat. Now What?

If you are an innocent spouse and marry a tax cheat, what can you do?

Let me share a real-life story:

Roberta and Tim have been married for over 25 years. Tim is self-employed and Roberta is a stay at home mom.

They travel all over the world, live in a multi-million dollar home­­…..and declare less than $50,000 in income on their tax return each year. While I’m no forensic accountant, it’s painfully clear that Tim isn’t declaring all of his income.

The IRS caught up with Tim recently. They audited his returns for the past 5 years and handed him a huge tax penalty.

Tim was lucky – he could have gone to jail.

What Roberta doesn’t know is that she’s lucky too. She was on the hook just as much as Tim since she signed the tax return.

Why is this important to you?

If you file a joint tax return, you do benefit by paying lower taxes, and that’s great. But sometimes one spouse goes too far in trying to reduce the tax liability. When they break the law, you’ve got a problem.

Why?

If you file a joint return and the information is false or wrong, the IRS can go after either of you because you both signed the return.

Big Brother can put you both (or individually) in legal hot water. And subsequent divorce won’t help you.

Even if your divorce decree says that one party has to pay the tax, the IRS doesn’t care. They can still come after you both.

So even if you are an innocent spouse, it’s really important for you to carefully review the tax return before you sign it. After all, you are liable for what you sign.

The typical situation:

Usually, one spouse knows more about the couple’s finances and files the tax return. Often, the other spouse simply signs the return without really understanding what’s in it.

So what can an innocent spouse do to protect themselves from becoming a target for the IRS?

1. Be aware.

Think about your lifestyle. What does it cost you to live? Where is the money coming from? Is it being reported? If you sign a fraudulent return, you are going to be held responsible. Roberta was living the life of Don Corleone. How can she claim to have the income of Homer Simpson? Don’t play that game….the IRS may not be so forgiving with you as they were with Tim and Roberta.

2. Ask questions.

If you see something on the return you don’t understand, ask. If something stinks, don’t let it pass. There is nothing so complicated that it can’t be made clear. Don’t stop asking questions until you understand what’s going on. If you have to, get your own CPA and get her opinion on the matters you question. Remember, this is your future we’re talking about.

3. Get to Kinko’s

Get copies of your last 3 years tax returns. Don’t count on your spouse to keep copies for you. Also, keep statements of investment and savings accounts for your own records.

4. Protect Yourself.

If you think your spouse is trying to pull a fast one, you’re going to have to protect yourself. Seek legal and tax advice from the pros. If your spouse is underreporting income or committing other tax fraud, start filing separate returns and set up separate banking and credit card accounts too.

Do you keep your own copies of your tax return? Do you understand everything in the return? Has this ever been a problem for you or someone you know? Would it freak your spouse out if you went through the return and asked questions?

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Crucial Tax Tips for Starting Your Own Business

I never thought the words “fascinating” and “accountant” could be put together in the same sentence. (Sort of like the widely held belief in the early 1930’s that atoms couldn’t be split). Well, get out the record books. History has just been made again.

I interviewed Mike Piper, accountant extraordinaire and brain genius behind Oblivious Investor on Wealth Pilgrim Radio yesterday. Over the course of the interview, I learned how vital a basic understanding of taxation is for the self-employed. In fact, this basic understanding can mean the difference between business success and failure.

I also take this issue really personally (maybe I need to talk this over with a shrink). As you know, I got some pretty crappy advice when I was a kid. I had to rely on my dad’s accountant and broker for advice after my father’s accident. The advice was self-serving and terrible. While that CPA did end up spending time in the slammer for screwing other people out of their money, that didn’t help me.

I really dislike it when professionals don’t show up for their clients. This is why I want you to be informed. This is why I want you to ask the right questions. Your CPA might not end up a jail bird, but it’s vital that you understand the basics so you don’t get sold a bill of goods.

OK. Enough. Let’s talk turkey.

Here are a few gems I picked up from Mike:

First, it’s crucial to set your business up correctly.

Should you set your business up as a sole-proprietor? An LLC? An S or C Corp? This decision will have far-reaching consequences on how much tax you pay and how much liability you take on.

Folks with modest incomes might stick with the sole-proprietorship but they take on limitless business liability if they do. That can hurt.

On the other hand, other forms of business limit your liability and save you tax money. However, these are more complicated and lead to higher accounting expense.

Did I learn which business entity is perfect for self-employed? Nope. According to Mike, it really depends on your situation.

These kinds of conversations are best handled between you and your tax preparer.

So, if you’re going to talk to your tax expert anyway, why bother learning this tax stuff?

As I said, you can’t afford to pay the price for your tax preparer’s mistakes.

Even if she’s a law-abiding CPA, don’t expect your tax preparer to be proactive. As a rule, accountants aren’t. They don’t like giving advice. Also, I hate to break it to you, but your accountant has 500 other clients to worry about and may not have time to think this question through as much as you might. You have a lot more at stake. You need to have a basic understanding of this issue so you can have an intelligent conversation about it when you talk to your accountant. You want to ask smart questions rather than just accept what you’re hearing.

Don’t get me started again.

So how do you get that knowledge? Well, Mike has an answer for that too.

He’s written a series of books about these types of issues. All the books are written in plain English and all have less than 100 pages. All righty! My favorite two are the “Surprisingly Simple” series.
I like the books because he explains for the everything for the self-employed in plain-English with no legal jargon. Here are a few of the topics he covers:

Business Taxation 101: A brief primer on tax topics in general, especially as they apply to businesses.

Home Office Deduction: How to ensure you qualify for it and how to calculate it.

Estimated Tax payments: When and how to pay them, as well as an easy way to calculate each payment.

Self-Employment Tax: What it is, why it exists, and how to calculate it.

Business Retirement Plans: What the different types are, and which one is best for you.

Numerous Business Deductions: Several deductions explained in detail, including how to make sure you can qualify to take them and how to maximize them.

Audit Protection: Learn what records you need to keep (and how long to keep them) in order to protect yourself in case of an audit.

Not bad when you consider he does it in under 100 pages.

Another tip often overlooked by self-employed people and their accountants comes into play when you think about retirement plans. Even if you have a full-time job and are covered by a retirement plan there, you may be eligible to create an additional retirement plan if your side business is profitable. This is a huge deal because it allows you to sock away big bucks (tax deferred) for “plenty long time”. It can mean the difference between a wonderful and weak retirement in your future.

So these two issues are huge and unfortunately many self-employed folks just outsource thinking about these decisions and just defer to their CPA’s. In essence, that is the reason why Mike wrote his books.

Mike gave me a few more tips and you can hear the entire interview if you like.

The last tip I’ll share with you is when Mike suggested we do our own taxes one year by hand. He didn’t suggest that you actually turn it in the IRS, but he did emphasize how much we’d learn simply by going through this process.

It does sound like a really smart idea…but I don’t think I’ll be doing it. My situation is kinda complicated and I don’t want to spend the time.

However, I’m glad I read Mike’s books. I feel empowered to have better conversations with my CPA next year.

What do you think?  Does it make any difference how much you know about taxes?  What have you done about it? Got any horror stories to share about CPA’s?

5 Ways (Some of Us) Can Stick It To The IRS In 2009

Last December, Congress approved a one-year holiday for RMD’s (required minimum distributions) in 2009.  That means that if you are over 70 1/2, you won’t be forced to take distributions. Unfortunately this RMD holiday is for 2009 only -  but you can really take advantage of this right now. Let’s get to work.