Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

What if I never knew about my spouse’s fraudulent tax return?

QBI, deduction, Section 199AIn my family divorce work, I sometimes encounter situations where one party in a divorce intentionally prepared a  tax return with a significant amount of taxable income not reported. In these instances the fraud[1] was not known by the other spouse. The IRS allows the spouse (“innocent spouse” in this instance) who had no knowledge of the fraud when the spouse signed the couple’s joint tax return to seek relief by filing the IRS’s Form 8857.

This form will assist the innocent spouse in avoiding a tax obligation relating to a jointly-signed tax return that was fraudulently prepared by the non-claiming spouse. The errors usually involve unreported income or an inflated deduction.

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If the innocent spouse files Form 8857, will the non-claiming ex-spouse become aware that the innocent spouse filed the form? Yes. By law, the IRS must contact the non-claiming spouse even if the spouses are no longer married. The ex-spouse will become aware of the filing, even if the filing spouse is a victim of spousal abuse or domestic violence. The innocent spouse should, therefore, consider all potential consequences if she/he makes a claim to get removed from the tax liability from under-reporting taxes to the IRS. The IRS will protect the innocent spouse’s privacy, however. The IRS will not disclose the innocent spouse’s personal information such as current name, address, phone number, information about his/her employer, his/her income or assets or any other information that does not relate to making a determination about the innocent spouse’s request for relief from tax liability.

While the burden of proof on non-compliance is placed on the IRS in most tax disputes, the innocent spouse will have to prove that they did not know of the fraud on the tax return when the innocent spouse signed it.

 

Don R. Bays, Director of Litigation and Valuation

 

[1] The term “fraud” as used in this article may or may not be considered criminal fraud by the IRS.  Honest mistakes can be made in the preparation of tax returns which do not qualify as fraudulent conduct.

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