Most discussions of tax evasion revolve around the taxpayer who actually engaged in it. While the focus on offenders is understandable, sometimes left out of that conversation are the innocent bystanders who suffer the financial and potentially criminal tax consequences – the husbands and wives who, unaware of their spouses’ financial activities, become entangled in a web of investigators, auditors, and prosecutors. Fortunately, the Internal Revenue Service offers programs that can help. As the name suggests, “innocent spouse relief” offers a measure of amnesty for taxpayers who meet IRS eligibility criteria, though some tax debts, such as certain debts related to interest or penalties, may be excluded. Voluntary disclosure programs, which are also offered by the IRS, also provide eligible taxpayers with a means of reporting formerly evaded income from a position of relative safety. For this reason, innocent spouse relief and voluntary disclosure programs are often compared and contrasted. However, while both may provide penalties relief and potential protection from prosecution, where deemed appropriate, there are critical differences between these options. Our tax relief attorneys explain some of the key distinctions.
Tax Evasion and Divorce | Tax Attorney
What is IRS Innocent Spouse Relief?
For many married couples, filing a joint tax return carries a distinct financial advantage, offering a larger standard deduction, opportunities to claim tax credits, and other opportunities to use the tax code strategically. However, the option to file jointly can also be a double-edged sword, exposing spouses to liability for the other person’s tax debts in the event that the IRS assesses additional tax, interest, or penalties. As a result, taxpayers who thought they were complying with the law may find themselves owing money or even facing criminal prosecution for tax crimes they were unaware of that occurred on a married filing joint return.
Innocent spouse relief seeks to address these types of scenarios. As the IRS explains, “By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return.” To apply for innocent spouse relief, the taxpayer must file Form 8857 (Request for Innocent Spouse Relief), which is a fairly extensive form asking the applicant to supply information such as:
- Contact information and marital status
- Whether there is a history of domestic abuse or medical issues
- Information about “if and how [the applicant was] involved with finances and preparing returns for [the relevant] tax years”
- Information about current debts, assets, income, and other financial obligations or resources
If the application is approved by the IRS, financial responsibility for the pertinent tax debts will possibly fall to the taxpayer’s current or former spouse, as applicable to the situation. However, applicants should be forewarned that not all penalties, nor all interest owed, will necessarily be deemed eligible. It is also crucial to understand that innocent spouse relief only applies to two types of tax debts:
- Eligible tax debts arising from personal income taxes
- Eligible tax debts arising from self-employment taxes (which uniquely impact expats and Bitcoin miners)
If you believe you could be a suitable candidate, you should discuss your situation with an experienced innocent spouse relief lawyer. There may be additional or alternative options available to help you. It is also worth noting that innocent spouse relief does not guarantee a pass on criminal prosecution for tax crimes that may have occurred on a married filing joint return signed by the “innocent spouse” during marriage or after date of separation.
What is involved with making an IRS Voluntary Disclosure Program?
A Voluntary Disclosure is an IRS policy that allows taxpayers to escape criminal prosecution where they self-report what could be viewed as tax crimes before they have been approached by the service with enforcement action related to it. Where purely domestic tax issues are involved a Domestic Voluntary Disclosure is appropriate. A Voluntary Disclosure may be more appropriate relief where fraudulent returns were signed during marriage as it guarantee’s a pass on criminal prosecution and your ex-spouse has ample opportunity to attempt to refute your innocent spouse claim with proof of culpable criminal tax actions of the purported “innocent spouse”. Things get more complicated where offshore income tax evasion may have occurred.
From 2009 until September 2018, the IRS operated a program alternately known as the Offshore Voluntary Disclosure Program (OVDP) and Offshore Voluntary Disclosure Initiative (OVDI). The purpose of these programs was to incentivize the voluntary admission of offshore tax evasion, offering taxpayers mitigated penalties – most notably, a level of safety from criminal prosecution – in exchange for the voluntary disclosure of income and accounts. Now that the OVDP has officially ended, thousands of taxpayers are being forced to evaluate alternative options.
The IRS, aware of this fact, continues to offer various options and programs for voluntary disclosure, each of which has its own set of eligibility requirements and stipulations for participants. While the OVDP may be over, examples of still-operational programs and submission procedures for voluntary disclosure include the following:
- Delinquent FBAR submission procedures (pertaining to Foreign Bank Account Reporting)
- Delinquent international information return submission procedures
- IRS-Criminal Investigation (IRS-CI) Voluntary Disclosure Program
- Streamlined Filing Compliance Procedures
Our international tax attorneys have previously discussed these and similar programs in depth. Some are designed for taxpayers who are located overseas, while others are meant for taxpayers in the United States. For detailed information about these programs, refer to the following articles:
- Foreign account reporting options for taxpayers who are ineligible for the OVDP – a category which now encompasses all taxpayers
- Alternatives to participating in the OVDP
- Domestic streamlined disclosure (for taxpayers living in the U.S.)
- Streamlined disclosure (for U.S. taxpayers living outside the U.S.)
In addition to various federal programs that are governed by the IRS, the state of California operates its own program, which is known as the California voluntary disclosure program, through the Franchise Tax Board (FTB). This program may enable participants to avoid various penalties arising from failure to file California income tax returns, file California information returns, pay California taxes, or maintain certain records. Furthermore, the California Department of Tax and Fee Administration (CDTFA) operates both in-state and out-of-state disclosure programs.
CA Tax Attorneys for Innocent Spouse Relief and FBAR (Foreign Bank Account Reporting)
Whether your tax liabilities are connected to previous failures to report income, or the unlawful tax maneuvering of a former spouse, you may be able to mitigate or even avoid civil and criminal tax penalties by pursuing voluntary disclosure or innocent spouse relief, depending on your situation. However, it is vital to act quickly in order to minimize the continued exposure. For a confidential, reduced-rate discussion about your options for seeking tax relief and securing a pass on criminal tax prosecution, contact the Tax Law Office of David W. Klasing online, or call our tax firm today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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