If you are an innocent spouse and marry a tax cheat, it can result in divorce or worse…..jail. What can you do? How do you protect yourself from a financially irresponsible spouse? Let me share a real life story: Roberta and Tim have been married for over 25 years. Tim is self-employed and Roberta stays at home.
They travel all over the world, live in a multi-million dollar home…and declare less than $50,000 in income on their business tax return each year. Tim’s business is a sole proprietorship, so that’s all the income they declare. While I’m no forensic accountant, it’s painfully clear that Tim isn’t declaring all of his income. And that’s not how to take advantage of legitimate tax deductions.
The IRS caught up with Tim recently. They audited his returns for the past five 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.
Note – One of the most important ways to protect yourself is to maintain tax records yourself – and make sure you hold on to those records even longer than the IRS suggests.
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.
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. It’s just like co-signing a loan.
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? Check your credit. (You can now get a free credit score without a credit card service charge.) Is it being reported? If you sign a fraudulent return, you are going to be held responsible. Roberta was living the life of Mrs. Don Corleone. How can she claim to have the income of Mrs. 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 three 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?