Innocent Spouse Married A Tax Cheat. Now What?

By Neal@Wealth Pilgrim on Feb 8, 2010 in Tax Strategies


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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  1. 9 Comment(s)

  2. By Financial Samurai on Feb 9, 2010 | Reply

    Best method is exactly to tell the spouse to stop cheating on his taxes, b/c it will affect them both. Then again, the gov’t taxes us way too much anyway, so maybe Tim is OK.

    Just tell Tim to use the money saved in his cheating and donate it to charity. Win win!
    .-= Financial Samurai´s last blog ..How To Get Your Super Motivated Boyfriend to Marry You =-.

    Neal@Wealth Pilgrim Reply:
    February 9th, 2010 at 7:17 pm

    Novel approach Sam…..nice

  3. By LeanLifeCoach on Feb 9, 2010 | Reply

    In this situation you could also explore the possibility of getting relived of the responsibility via the Innocent Spouse Relief process.. http://www.irs.gov/pub/irs-pdf/p971.pdf
    .-= LeanLifeCoach´s last blog ..Personal Finance Can Be Fun! =-.

    Neal@Wealth Pilgrim Reply:
    February 9th, 2010 at 9:08 pm

    Absolutely correct. There are actually a few things you could do. I was considering doing an entire post on the options….

  4. By Erik on Feb 12, 2010 | Reply

    How about some serious marriage counseling? Both parties are at fault here: Tim is a liar playing an illegal game that seriously jeopardizes his and his family’s. Roberta is at best naïve, and at worst is an accomplice.
    It strikes me as odd to suggest “protecting yourself” by getting separate accounts and credit cards. Then what? Let the cheating spouse continue cheating? That’s like suggesting a wife letting her husband continue fooling around with a mistress but insist that she wear a female condom to protect herself from STDs. C’mon.
    When you get married (even with a JP in the courthouse) there should be a team formed, that is, two parties working together in a trusting relationship. Splitting finances or donating money to charity just covers up the symptom, it doesn’t address the problem. I hate paying too much in taxes just like most Americans; however, there are legal remedies. Take deductions where they are allowed, invest in tax exempt municipal bonds, stash money in ROTH IRA to reduce retirement income tax. And for goodness sake, sit down with your spouse each month and go over the budget. That keeps both parties honest, informed and working together, the hallmark of all successful marriages.

  5. By Neal@Wealth Pilgrim on Feb 12, 2010 | Reply

    Erik,

    Thanks again. I completely agree that separating the accounts isn’t anywhere near sufficient. That’s why I suggested the spouse seek professional guidance immediately.

  6. By Erik on Feb 12, 2010 | Reply

    I was taking issue with the only advice being “seek legal and tax advice”. To me, that’s only the symptom, not the root of the problem. Yes, these would be important steps, but the core issue here is a marriage that needs serious help…something most lawyers and CPAs can’t do much with. But as this is a post on wealth matters, perhaps that doesn’t fit the context.

  7. By Neal@Wealth Pilgrim on Feb 12, 2010 | Reply

    I think your comment absolutely fits the context and I agree that the marriage issue is core. I’m glad you brought it up Erik.

  8. By Len Penzo on Feb 14, 2010 | Reply

    Although it was kind of implied in the other steps, Neal, I think this step needs to be explicitly called out:

    If you aren’t satisfied the return is accurate: DON’T SIGN THE RETURN! It is your responsibility to ensure the return your spouse submits to the IRS is accurate.
    .-= Len Penzo´s last blog ..Black Coffee: My Favorite Blogs, Money News & Opinions #33 (Decaf Edition) =-.

  9. By Neal@Wealth Pilgrim on Feb 14, 2010 | Reply

    Len….excellent point. Well worth the focus. Thanks.

  10. By Betty on Mar 24, 2010 | Reply

    I married a tax cheat! What do I do?

    My husband is self employed and has not paid taxes since 2001. I was not aware of this when we married. He appeared to be a very together, successful business owner. I think I found out about a year and a half into the marriage. We have almost been married 3 years, married ironically on April 15, 2007. Since the day I found out I have asked him to take care of it, do the right thing, etc. I have lost countless nights of sleep worrying about this.

    He has had the taxes prepared for all those years. That is a good first step. HOWEVER he owes thousands and I do not see anyway for him to pay them off any time soon and I can’t even trust he will, base on his history. He wants me to file jointly for the years we have been married because it would save him about $20,000 (not included penalties and interest). That is how those returns were prepared.

    I am going to REFUSE to file a joint return! I am also seriously considering a divorce or a legal separation ASAP. I do not want to leave him because I love him and value the companionship. I just want to distance myself financially and legally and hope that he does take care of this the way he is promising. In the mean time I just don’t think I can take any chances.

    We are certainly not living a glamorous lifestyle as the couple above did. We do not own a home, take fancy vacations or own expensive cars. I have separated my finances from him and struggle a bit to make ends meet for my 3 children and myself with my $40,000 a year income.

    I want to be able to protect myself and my children’s future. What do I do in this situation? Divorce? Legal separation? Separate finances? NOT filing a joint return? Anything else?

    I really want to be smart about this and do the right thing!

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