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Divorce, Taxes, and the IRS
from: Howard IkenCopyright 2006 The Divorce Center P.A.
In Divorce, potential tax liability can frequently become the
tool for one spouse to use against the other spouse. If
improperly used, this tool can destroy all of the marital
assets. In the worst case, tax liability can seriously impact
the future financial security of either spouse and subject them
to criminal sanctions.
Situation 1 - Your Spouse Owns a Business
The most common situation where taxes become an issue in a
divorce is they there is a family business. The owner - spouse
may have hidden cash receipts or engage in a practice of
recording inflated expenses. This common practice by many
business owners is a fraudulent attempt to minimize taxes. The
other spouse is often aware of and approves of this practice.
During the marriage, minimization of taxes results in higher
household income and a better lifestyle for the couple.
This practice is illegal or borders on illegal. During the
marriage it is a secret between the married couple. But during a
divorce each spouse may try to use past tax behavior to gain an
advantage. The owner - spouse wants to minimize past income in
an effort to lower child support, alimony, or division of
marital property. Of course the other spouse wants to prove the
opposite.
The result is a game of chicken - with one spouse threatening to
turn the other spouse in to the IRS. This is a dangerous game
for all involved. Do it yourselfers will find the situation
blowing up in their face. People with attorneys may find the
attorney reluctant to deal with the situation.
The Potential Problems:
* Your Attorney cannot assist the owner/spouse commit the crime
of tax evasion. * The non-owner spouse may end up liable for
half of the back taxes, penalties, and fines. * The divorce
court Judge may decide to turn everyone in. * In an extreme
situation, everyone can go to jail.
Situation 2 - You Make a Surprise Discovery: Your Spouse is a
Tax Cheat
Another common situation in divorce: the sudden realization that
a spouse is a tax cheat - and you were completely unaware until
the divorce.
The Potential Problems:
* You may end up owing the IRS half the overdue taxes. * You may
end up owing the IRS the ENTIRE tax bill. * The overdue tax bill
may be double the actual unpaid taxes, due to penalties, fines,
and interest.
The Potential Solution:
The IRS has a provision called Innocent Spouse Relief. This
provision gives complete or partial tax forgiveness to an
innocent spouse. But be aware - the definition of "innocent" is
technical, elusive, and difficult to understand.
Two available forms of tax relief:
* Innocent Spouse Relief - Discharge of Liability * Separate Tax
Liability for Each Spouse
The first form of relief wipes out your tax debt in part or
full. You must have not had any knowledge of the incorrect or
fraudulently prepared tax returns. That means you cannot look
like you were aware of any part of the return. Also, you must
not have benefited from the hidden income. That means you cannot
be driving a Mercedes and at the same time signing a tax return
that show $200/week in income.
The second form of relief is slightly easier to get. If you
qualify, the IRS will separate out the tax liability of your
income from your spouse's hidden income. This type of relief may
have the effect of wiping out extreme tax bills and penalties.
The Bottom Line: Always be aware of these types of tax
situations. The financial effect can be far worse than the
divorce. If you believe this type of problem is in your future,
start preparing immediately. Do not sign a joint tax return for
your upcoming tax filing. File married-filing-separately. The
moment you suspect a potential tax liability, begin to separate
your financial life from your spouse's financial life and then
promptly file for divorce.
About the author:
Divorce Attorney Howard Iken has a rapidly growing divorce
practice in the Tampa Bay area of Florida. He can be reached at
727-844-7676. More information on divorce can be found at
http://www.18884mydivorce.com More information on Divorce
Attorney Howard Iken can be found at
http://www.18884mydivorce.com/pub/Aboutus/aboutus.htm
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