Tax Evasion and Divorce
Risks Presented by Tax Fraud or Evasion Allegations in a DivorceThe 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 martial 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 Offshore Voluntary Disclosure Program (OVDP) or Streamlined Disclosure. 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.
Criminal Tax Concerns Regarding Offshore Asset Protection Schemes in a Divorce or Separation ProceedingPerhaps 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.