Divorced spouses of tax cheats may avoid punishment

| Oct 28, 2020 | Family Law

Disagreements over money, financial priorities and spending are a common reason for couples to divorce. During the process of filing, financial improprieties may come to light, such as a secret credit card, money spent on addiction or even cheating on taxes.

Consciously filing an erroneous joint tax return with excessive deductions or unreported income can lead to severe penalties. However, the IRS is aware that one spouse may control the finances, leaving the other in the dark about financial wrongdoings. It has an Innocent-Spouse Rule for such transgressions.

Who is eligible?

The spouse is innocent if they can prove one of the following conditions:

  • The other spouse wholly and secretly prepared the erroneous joint tax return.
  • The non-preparer did not know that the filing was inaccurate.
  • The IRS agrees that the spouse was innocent of wrongdoing.
  • The innocent spouse files an IRS form 8857 within two years of the IRS initiating collection.

The innocent spouse may also apply for separate election liability if the spouse who knowingly filed an erroneous return and subsequently dies or the divorce was finalized after the filing. While the IRS is usually tasked with the burden of proof, the claimant must prove their innocence in this case.

Complicated divorces often require legal guidance

It can be challenging for families with a long list of assets or complex financial arrangements to distinguish honest from dishonest tax filings. Those planning to divorce who suspect their spouse is dishonest can often protect their economic interests, rights and freedoms by working with an attorney with experience handling high asset divorces. They can untangle the web of deceit or work with a forensic accountant to determine an accurate financial ledger during the divorce process.