by Brian Mahany
Just a few days ago I wrote about the recent changes to the IRS innocent spouse regulations. Until recently, the program, which helps people get relief from the tax misdeeds of their spouses, was very time limited. By regulation, the IRS bowed to political pressure and allowed victims more time to seek relief. Our office has handled a number of innocent spouse tax cases, all in which the wife was the innocent spouse.
It’s not uncommon for the husband to own a business while the wife raises a family or is a W2 wage earner. (Wage earners have a much lower rate of cheating on taxes than self employed people.) Of course, many woman own businesses and tax evasion knows no gender boundaries. Still, innocent tax cases involving tax cheating wives are statistically relatively rare. So this story by Peter J. Reilly in a Forbes blog was quite interesting.
Timothy Lee Richard was married to Susan Ellis. Beginning in 2004, Richard developed health problems; serious ones. He needed open heart surgery and developed cancer. Ultimately, his earnings would fall to $14,000 that year while Ellis made $276,000. Apparently that was not enough income. Ms. Ellis took $50,000 from her 401k and never reported the distribution on the couple’s joint tax return. The parties soon divorced and in 2006 the IRS came knocking.
Mr. Richard filed for innocent spouse relief. Although the IRS denied the request, the U.S. Tax Court reversed the IRS and said Richard was responsible for relief. Why?
To qualify for relief, the innocent spouse must demonstrate that he didn’t know about the taxable distribution nor should he have known. Even though the money went into a joint bank account, Richard claimed that he was not aware of the source of the funds and didn’t handle the family’s finances.
By winning his appeal, Mr. Richard is not responsible for the tax debt even though he signed the 2004 joint return. In practical terms, this means that Richard’s ex-wife is responsible for the entire tax debt.
To recap, in order to qualify for innocent spouse relief there must first be a joint return. The safest way to avoid liability is to file separately, although most couples take advantage of the tax benefits available to joint filers.
Next, the innocent spouse must prove that he or she did not know of the activities of the other spouse. Remember that the IRS will deem that you knew or “should have known” if you seek innocent spouse relief while signing a joint return showing income well below what is reasonable to sustain your lifestyle. In simple terms, if you are a stay at home dad and sign a joint return showing income of $10,000 yet drive a new Porsche and live in a half million dollar house, you can’t blame your spouse and can’t deny knowledge of her tax cheating.
Hit tip to Peter Reilly for the story.
If you think your spouse may be cheating on taxes, don’t sign a joint return. If it’s too late and you discover the problems after an audit, find a competent CPA or tax attorney too help you file for innocent spouse relief. The tax lawyers at Mahany & Ertl can help with a wide variety of tax problems. Contact attorney Brian Mahany for a confidential evaluation of your innocent spouse, collection or audit matter. Brian can be reached at (414) 704-6731 (direct) or by email at
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Wisconsin, Michigan, Maine & Portland. Services nationwide.