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In the Dark on Taxes?

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Dear Carolyn:

I think my husband and I may be getting separated and divorced, and I am concerned about our 2016 tax return, which has not been filed yet. The tax return is under an extension.  My husband has a small business in Greensboro, and I have no idea if he reports all of the income in the business.   I have heard that I can be responsible if I sign the return.  He never gives me a copy.  Do you have any thoughts on this issue?  Do I have to worry?

Worried and in the Dark

Dear Worried and in the Dark:

This is always a tough decision, and the law that applies to this is called:  “Innocent Spouse Relief.”  There are some things that you need to know in making the critical decision of whether to file a joint income tax return with your spouse.

First, you need to know that you do not have to sign a joint return, but if you elect to do so, you are potentially 100 percent liable for any income taxes, interest or penalties related to the return you sign.  Yes, I said 100 percent, not 50 percent.  You see, the Internal Revenue Code holds each signer of a tax return jointly and severally liable for all taxes, interest and penalties, absent a co-signer being an innocent spouse. So, to me, signing a joint tax return is always a big decision for a person with a small business.  Contrast this with spouses who both have W-2 incomes from employment with third parties;  if the only income on the return is W-2 income, then generally it is safe to sign a joint return properly prepared.  You, however, are in the riskier situation with the small business.

Second, don’t assume that you will be granted innocent spouse status with the IRS just because you don’t know much about the tax return.  There are many, many factors the IRS considers in whether to grant innocent spouse status to a person in your position.  Note, it is easier to obtain innocent spouse treatment if you are separated or divorced because there are different innocent spouse standards applied to those who are divorced, as contrasted with persons married and living together.

You might review IRS Form 8857, which is the form you file for Innocent Spouse Relief.   Read through the form and look at the factors considered.   There are many factors, but a few are the following:

First, the IRS considers your lifestyle as contrasted with the amount reported on the return. For example, if you are living in a big, expensive home and driving new cars and reporting $20,000 on the tax return, you need to find out where the money is coming from for this lifestyle that you are currently living and spending. The IRS expects that you make a reasonable inquiry.  You need to require that you receive copies of any return you sign.  Your tax return preparer must also give you copies of your returns for a reasonable copy charge.

Another factor the IRS will review is whether you have been a victim of domestic violence. One area of domestic abuse is financial control and oppression.  While this will not likely get you a 50B domestic violence protective order in domestic courts, financial oppression is reviewed carefully by the IRS.

As a final consideration, whatever unpaid taxes are owed for 2013 will be a marital debt in your equitable distribution (property settlement); therefore, this is one factor going in your favor of filing a joint return, which is usually the least expensive filing status.

I would recommend that you consult with a family lawyer and with a CPA or lawyer skilled in Innocent Spouse Relief. Filing a joint return can be a very big decision.  Likely the return is extended until October 15, so you still have some time to carefully research your options.  Good luck!