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Tax Evasion and Divorce

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    Frequently Asked Questions

    Risks Presented by Tax Fraud or Evasion Allegations in a Divorce

    Getting a divorce involves more than terminating a marriage and dividing the marital assets. There is an entire package of rights and obligations that need to be discussed and resolved. Clients often seek the advice of a divorce attorney who understands marital issues but is not well versed in the tax consequences of the divorce arrangements. This can be a catastrophic lack of judgment. The client must have a tax advisor to guide him or her through the tax ramifications of any divorce or separation agreement. Careful planning is sine qua non to the proper representation of a client.

    We are aware that a divorce can be a remarkably tough time for any individual. However, factoring in the division of your assets and the taxes associated with your estate can be an extremely grueling experience. This can be made many folds worse by a partner who is resentful and vengeful if you have ever committed tax fraud and made the mistake of sharing this information with your significant other. Your partner can become the bane of your existence at the time of divorce. If he or she decides to divulge this information to the authorities, you could be in significant trouble to the extent of criminal tax prosecution. It is also very common for one spouse to use the threat of a criminal tax referral or whistleblower claim again the other spouse in an attempt to gain leverage / the upper hand in divorce court.

    The risks presented by asset protection plans and schemes used to insulate assets from domestic judgments are far from the only risk factor. Since, under state law, divorce cases involve the exchange of thorough and complex financial disclosures coupled with feelings of resentment and betrayal, it is not uncommon for one spouse’s inkling of suspicion to grow into full-blown accusations of tax fraud or tax evasion. The ex-spouse may believe that he or she is protected from civil or criminal liability due to innocent spouse relief and therefore feel empowered to threaten to reveal failures to file taxes, failures to pay taxes, mischaracterized income, overstated deductions, undisclosed foreign accounts, or an array of other tax crimes. The former spouse may attempt to use these accusations in an attempt to extort a large marital settlement and other favorable support terms.

    It is essential to have a knowledgeable tax attorney who can assess the veracity of the allegations and whether they constitute a real risk. A tax attorney is required because only the attorney-client privilege is robust enough to protect disclosures of potentially criminal actions. Furthermore, the tax attorney can bring in an accountant or forensic accountant who can then enjoy a similar level of confidentiality through a derivative attorney-client privilege. However, potential criminal disclosures to an accountant are only protected when the accountant is working under the direction of an attorney trough a Kovel letter.

    In certain cases, a tax attorney may be able to defuse these allegations while simultaneously providing protection from penalties. For instance, problems with undisclosed foreign accounts can often be resolved through the IRS’s Voluntary Disclosure program or Streamlined Voluntary Disclosure program However, time is of the essence because these programs will be unavailable if the IRS or DOJ become aware of the non-disclosure or investigate the same. The tax attorney can also explain the difficulties of qualifying for innocent spouse relief and the fact that accusations of this type may place all or significant amounts of marital assets at risk. He or she can also explain the difficulties of expecting spousal or child support payments from an incarcerated spouse.

    How can our background as Dual Licensed Tax Attorneys & CPAs help?

    Divorces are often shrouded in a fog of anger and suspicion. Suspicion begets accusation, and truth frequently becomes a victim of mistaken memory or intentional distortion. Groping in the fog becomes dangerous for both spouses and lawyers when accusations involve the parties’ historical tax filings. At the Tax Law Offices of David W. Klasing, we are always alert to potential tax crimes and understand that the objectives in the divorce proceeding will often be at odds with protective measures designed to mitigate potential criminal tax violations.

    Accusations about tax matters may involve unreported income, erroneously claimed deductions for personal living expenses, false statements to tax authorities, unreported foreign bank accounts, and/or specific transactions or other tax-related items. The accusations may all have financial implications for the divorce, affecting such issues as the amount of alimony and the distribution of assets, as well as the credibility of the spouses in the eyes of the court. Implications on the tax side involve more than financial concerns, however. If accusations are probably true and become known to the IRS, you are at risk of facing incarceration and increased tax liability, plus civil and criminal monetary penalties. Although state divorce proceedings and mediation mandate disclosure of relevant information, criminal tax defense emphasizes legally limiting disclosure of potentially incriminating evidence. Thus, there is a conflict of purposes as well as a disharmony of consequences between divorce representation and criminal tax defense. We, through our years of experience, know exactly how to hold hands with your divorce counsel to walk this fine line, ensuring the best possible outcome for our clients.

    Since spouses often harbor unfounded suspicions about a mate they are divorcing, we always try to ascertain whether an accusation of tax fraud merits further investigation. The naked statement, “My spouse has a Swiss bank account,” without the slightest corroborating shred of proof, may turn out to be true, but not provable, under even the civil burden of a preponderance of the evidence, much less beyond a reasonable doubt. Therefore, we always vet a client’s suspicions under the veil of the attorney-client privilege. After being retained, we inquire into a client’s concerns about previously filed tax returns or suspected tax indiscretions. We probe why a certain belief is held and whether independent proof exists in documents and/or testimony of others.

    Risks of Prematurely Engaging a Forensic Accountant

    If the accusation of tax fraud appears to have merit, a forensic accountant should NOT be employed until the tax issues underly the tax fraud is first addressed and potentially resolved. Instead, a criminal tax defense tax lawyer should advise the client and supervise the conduct of a tax investigation for the specific purpose of determining if tax crimes have been committed and recommending steps to mitigate the client’s exposure. The other side should be advised of developments and that the divorce case should not continue until tax issues are resolved.

    If the lawyer believes the accusation of tax fraud lacks merit, the divorce case can go forward, but the forensic accountant should be advised to immediately report to the lawyer any suspicions of tax improprieties and told not to discuss such matters with anyone, especially the client. If evidence of tax crimes arises, it is imperative to consult a criminal tax defense lawyer and reinitiate the process outlined above.

    Please note that the forensic accountant has no attorney client communication privilege because the CPA’s tax advice privilege does not exist in criminal tax matters. The attorney-client privilege will not cover a forensic accountant who is employed to give testimony in a divorce case. Moreover, it may be difficult or impossible to segregate consulting services from expert services. Documents created by the forensic accountant will not constitute attorney work-product because they will have been prepared in support of the expert’s testimony and therefore are discoverable.

    Documents given by the client to the expert will lose Fifth Amendment protection. Thus, the forensic accountant should not be employed in a tax investigation to prevent supplying the government with a star witness. Instead, the criminal tax defense lawyer should directly employ an accountant, often called a Kovel accountant for the named case, to assist tax counsel in rendering legal services to the client. The Kovel accountant should not prepare tax returns because tax preparation is not considered a legal service, and information going into the tax return is therefore not attorney-client privileged or attorney work product.

    Kicking the Hornet’s Nest

    Consider the following: Divorcing spouses are engaged in mediation and have resolved all issues except alimony. It is getting very late in the day, and everyone is weary of the process. The parties are stuck on alimony. To soften the financial blow and close the deal, the mediator suggests that the business spouse pay personal expenses of the nonemployee homemaker spouse from his business in lieu of paying direct alimony. In that way, it is suggested that the business spouse will obtain a tax deduction, whereas the homemaker spouse will have no taxable income.

    The lawyers and parties agree to this approach and begin to incorporate language into the mediated marital settlement agreement. One of the lawyers asks during dictation whether claiming these deductions by the business is legal. The business spouse’s accountant, also present, interjects that “although not technically legal, this sort of thing is common practice and no different from the spouse’s already deducting his own automobile expenses, which also are personal.” He adds, “The company has never been audited, and the expenses, although significant, are not large in relation to the company’s gross revenue.

    The agreement, including the expense payment provision, is signed and filed with the court. The accountant later prepares the tax returns, which the business spouse files. He or she claims the deductions.

    The parties, the mediator, attorneys, and accountant, in so agreeing, have turned collaborative law into putative criminal conspiratorial conduct. Some or all of the conspirators may have together or alone committed other tax offenses under the Internal Revenue Code, including tax evasion, aiding and abetting, and filing a false return–all serious felonies.

    All of this could have been avoided by engaging the help of an expert in the field. David Klasing is a former public auditor and dual-licensed Tax Attorney and CPA who understands and can anticipate federal and state auditing practices and methodology. He can use this knowledge to develop responsive strategies to the particular issues you face. All of the Tax Lawyers and CPAs of the Tax Law Offices of David W. Klasing are experienced in federal and state tax controversies and can fight for you in an aggressive and strategic manner, and some have a master’s degree in taxation and some have a decade or more of tax experience.

    Criminal Tax Concerns Regarding Offshore Asset Protection Schemes in a Divorce or Separation Proceeding

    Perhaps one of the most consequential aspects of divorce tax planning is the possibility of facing criminal tax charges for actions taken prior to or during the divorce or separation. While most people would consider themselves financially savvy and unlikely to commit fraud, the strong emotions and sense of betrayal felt during a divorce can cause people to take actions without fully considering the full scope of potential ramifications. Consider the unfortunate scenario that unfolded for Anchorage plastic surgeon Dr. Michael D. Brandner.

    For decades, Bradner was a respected surgeon who was apparently quite successful. Unfortunately, Bradner’s life would start to spiral out of control and culminate in a federal tax evasion conviction when his wife stated that she was seeking a divorce from the doctor. At this point, Bradner enacted a form of an offshore asset protection scheme where he sought to conceal marital assets and place them far beyond the reach of his soon-to-be ex-spouse.

    Shortly after the divorce was filed, Bradner somewhat inexplicably set out on a secret road trip that would take him from Tacoma, Washington to Costa Rica. Bradner traveled by car and after reaching Costa Rica, he opened two bank accounts depositing $350,000 cash and placing 1000 ounces of gold in a bank safe deposit box. He then continued on to Panama where he formed a sham entity to open another bank account. Bradner deposited approximately $4.8 million into this account. Following the end of the divorce proceedings, Bradner attempted to repatriate these assets but was caught by a government informant working in the Panamanian bank. Bradner was convicted by a federal jury of three counts of tax evasion and four counts of wire fraud. Theoretically, Bradner could have faced additional penalties related to his failures to disclose the accounts as per FBAR and FATCA. In any case, Bradner will serve years in federal prison as a result of his convictions.

    Why You Need Us?

    Divorces are difficult and are made exponentially more so when criminal tax issues are present. Every participant in a divorce proceeding must be alert to the suggestion of criminal tax issues and know when to step cautiously, lest he or she unwittingly kick a hornet’s nest. The divorce can be stung by a criminal tax investigation, or the lawyer may feel the personal sting of a tax conspiracy or an aiding-and-abetting charge. The IRS has long proven itself extremely capable of investigating both civil tax fraud and criminal tax fraud. The investigation of tax fraud is one of the most important phases in the administration and enforcement of tax laws.

    The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers in various civil and criminal divorce tax situations. Going through a divorce can be very difficult; failing to address important tax issues can multiply anger and frustration. An experienced tax attorney should work closely with a spouse’s family law attorney to ensure that all tax issues are addressed and that any divorce or separation agreement does not create any negative tax exposures for either party. If your case is not handled properly, there is always the possibility that your case will be referred by the civil examiner to the IRS’s criminal investigation division (CID). To speak to our Tax Lawyers, who are experienced and thoroughly versed in IRS and California audit and criminal tax investigation techniques and the litigations and appeals processes, call 800-681-1295 or contact us online today to schedule a reduced-rate initial consultation.

    “Mr. Klasing was an incredibly intelligent, resourceful, and professional who helped me answer some very difficult questions with ease and brevity. This allowed him the opportunity to showcase his expertise in myopic, highly complex overlapping areas of family law, criminal law, and tax law. He led me to a conclusion of how to handle a matter which was vexing, to say the least, and had proven very difficult to get expert advice on due to it’s complexity. I am incredibly grateful for Mr. Klasing and the time he so kindly spent with me. It was transparent that he actually cared about the human cost of my issue, and that is a rare thing to find in a cold, transactional world. Thank you, and I wish him the best.”

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    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

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