Tax Evasion and Divorce
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 intelligen, 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."
More Commonly Asked Tax Audit Questions
- How should Tax Audits be Handled by Criminal Tax Counsel?
- How to survive audit when I cheated on return being audited
- What is an eggshell audit?
- What is a reverse egg shell audit?
- Why is a reverse egg shell audit dangerous for a taxpayer?
- Warning signs of a criminal referral from an IRS audit
- Effective tax defense counsels goals in an egg shell audit?
- How are the 4 goals and outcomes 1 and 2 best obtained?
- What are the possible outcomes of an egg shell audit?
- Is it my right to know why I was selected for examination?
- What can I do to prepare for an audit?
- What is an IRS civil examination?
- How IRS decides which tax returns are audited
- What are my appeal options if I disagree with IRS?
- What are my basic taxpayer rights if the IRS audits me?
- Options if I am unable to pay at the conclusion of audit
- What a 30 or 90-Day Letter from the IRS means
- What is involved with appealing disagreements?
- Rights to disagree with IRStaxauditor’sss findings
- Can I stop the IRS from repeatedly auditing me?
- Can I have the examination transferred to another area?
- Can I record my IRS interview and is it a good idea?
- How many years of returns are at risk during an audit?
- Common reasons for the IRS to conduct a tax audit
- How to avoid negative consequences from an IRS interview
- Have to agree to interview by taxing authority directly?
- Are all audits the same?
- What should I do if the IRS is investigating me?
- What ifIdon’ttt respond to a taxing authority audit notice
- Your rights during an IRS tax audit
- Risks of attending an IRS audit without a tax lawyer
- Most common audit technique used by taxing authorities
- Don't go into an IRS audit without representation
- Why hire an attorney to represent me in an audit?
- Why hire David W. Klasing to represent me in an audit
California Sales Tax Questions and Answers
- Common issues encountered during sales tax audit
- What is a sales tax audit?
- Disagreeing with business audit conclusions
- Timeline to file Petition for Redetermination?
- What should Petition for Redetermination contain?
- Is the appeals conference formal or informal?
- Appeals Division’s Decision and Recommendation
- Are a mark-up percentage and a profit margin the same?
- Problems with the mark up audit
- Can State Board of Equalization ignore my business records
- What is a sales tax deficiency determination?
- Business being audited for sales tax. Should I be worried?
- Audit determined fraud to avoid sales and use tax
- Definition of “sale” for California Sales Tax
- What do California sellers need to know about sales tax?
- How do I apply for a sellers permit?
- What are my obligations as a permit holder?
- What is sales tax?
- What is tangible personal property?
- What is a sale?
- What are total gross receipts?
- What is use tax?
- Who is responsible for paying the use tax?
- Who is a retailer engaged in business in California?
- Who is a qualified purchaser?
- Do I need a Certificate of Registration Use tax?
- Do I need a Use Tax Direct Payment Permit?
- What types of sales are exempt from sales tax?
- How are Internet Transactions Taxed?
- How is California sales or use tax determined?
- What is the statewide sales and use tax rate?
- Are there other local and district sales and use taxes?
- Total sales and use tax rate calculation
- How to protect against successor liability in California
- Recourse when issued California sales tax liability notice
- CA Sales Tax liability extend to purchasers/successors?
- Waiting Until Audited to Take Action on Tax Matters
- Sales tax records needed in California
- What are California’s sales and use taxes?
- Why does the State of California audit businesses to ensure compliance with sales and use taxes? How does the State determine whether to audit my business?
- The BOE reviews the purchase invoices of my business
Questions and Answers for Criminal Tax Representation
- When tax defense counsel parallels tax crime investigation
- Guilty of tax obstruction by backdating documents?
- To be found guilty of tax obstruction must a person actually be successful in impeding the IRS’s functions?
- Help! The Document I Gave the IRS Had False Information
- Tax crime aiding or assisting false return IRC §7206(2)
- What is the crime known as tax obstruction § 7212?
- What is the difference between tax perjury and tax evasion?
- What is the tax crime commonly known as tax perjury?
- What is a Klein Conspiracy?
- Increased possibility of civil action in IRS investigation
- Am I Guilty of Tax Evasion if the Law is Vague?
- What happens if the IRS thinks I committed tax crimes?
- What are ways to defend against a tax evasion charge?
- Difference between criminal tax evasion and civil tax fraud
- What accounting method does the IRS use for tax fraud
- Can I Change Accounting Method to the Accrual Method
- What is the willfulness requirement for tax evasion?
- I didn’t know I committed tax fraud. Can I get off?
- Concealed assets from IRS. Can I avoid tax evasion charges
- How government proves I willfully engaged in tax evasion
- What is the venue or court where a tax crime case is heard?
- Must the IRS prove tax crimes beyond a reasonable doubt?
- Is it a crime to make false statements to the IRS?
- Will the IRS overlook my tax evasion if it’s minor?
- Failed to tell IRS about my nominee account
- Audit risk with cash based business transactions
- How to defend a client charged with tax evasion
- Is it tax evasion if I didn’t file income tax return?
- Government says I attempted to evade my taxes. Now what?
- I forgot to pay my taxes or estimated tax. Is this a crime?
- Government proof I “willfully” failed to pay taxes
- 5 Ways to Respond to Tax Evasion Charges
- Being audited after using a tax professional
- Rules for what an IRS agent can do while investigating me
- How tax preparers, attorneys and accountants are punished
- How the IRS selects tax crime lead for investigation
- How does the IRS prosecute suspected tax crimes?
- Does IRS reward informant leads for suspected tax crimes?
- How the government proves deficiency in a tax evasion case
- Do prior tax crimes factor into new IRS tax convictions?
- Requesting conference before investigative report is done
- Requesting conference after IRS Special Agent Report
- What are my rights during an IRS criminal investigation?
- Avoid prosecution for tax crime with voluntary disclosure?
- Defense tactics that make it hard for to prove willfulness
- How a tax attorney can stop your criminal tax case?
- What can you generally tell me about tax crimes?
- Continuing filing requirement with investigation pending
- Federal criminal code crimes that apply to tax issues
- Penalty for making, subscribing, and filing a false return
- CID special agent’s report for criminal prosecution
- What is the discovery process in a criminal tax case?
- What the IRS includes in indictment for tax case
- What is the hardest element of a tax crime to prove?
- IRS methods of gathering evidence to prove tax crime
- What does a grand jury do in IRS tax crime prosecution?
- Failure to keep records or supply information
- Failure to make a return, supply information, or pay tax
- What is attempting to evade payment of taxes?
- What is income tax evasion and how is it punished?
- What is attempted income tax evasion?
- What is the crime of failure to pay tax? What is punishment
- Crime of making or subscribing false return or document
- Criminal Investigation Division investigation tactics
- Tax crimes related to employment tax forms and trust funds
- Tactics to defend or mitigate IRS criminal tax charges
- How the IRS generates leads about suspected tax crimes
- What is the crime ”evasion of assessment” of tax?
- Specific examples of “attempting” to evade tax assessment
- What is the so-called Spies evasion doctrine?
- Does overstating deductions constitute tax evasion?
- Is it tax evasion if my W-4 contains false statements?
- IRC §7201 attempt to evade vs. common-law crime of attempt
- What are the penalties for Spies tax evasion?
- How government proves a taxpayer attempted tax fraud
- What is a tax that was “due and owing.”
- What is evasion of assessment for tax liability?
- Is evasion of assessment different from evasion of payment
- Does the IRS have a dollar threshold for tax fraud?
- What is the IRS burden of proof for tax fraud convictions?
- Are Tax Laws Constitutional?
- What is the source of law that defines tax evasion?
- Does section 7201 create two distinct criminal offenses?
- Does tax evasion definition include partnership LLC
- What if I helped someone else evade taxes?
- Is it illegal to overstate deductions on my tax return?
- Is it illegal to conceal bank accounts from the IRS?
- Do later losses justify prior deductions?
- Common reasons the IRS and DOJ start investigations
- What is the Mens Rea component of tax crimes?
- What is a proffer agreement and what are the risks?
- Why to have an attorney to review a proffer agreement
- Why enter into a proffer agreement?
- Limited use immunity from proffer agreements
- Difference between civil and criminal fraud allegation
Questions about delinquent payroll taxes and trust fund recovery penalty
- What happens if an employer continues to incur new payroll tax liabilities?
- California Employment Taxes Basics
- How Does the IRS Develop an Employment Tax Fraud Case from the First Indication of Fraud to a Criminal Indictment?
- Can more than one person be considered responsible by IRS
- How unpaid employment tax payments are allocated
- When a corporate officer is considered a responsible party
- Examples of trust fund recovery penalty determinations
- Failing to pay employment taxes after notice is given
- How to determine responsible person for trust fund recovery
- Assessing trust fund recovery penalty and option to appeal
- What is the trust fund recovery penalty?
- What are the penalties for failure to pay employment taxes
- When am I considered liable for company’s employment taxes
Frequently Asked Questions
- When is a Divorce likely to lead to Criminal Tax Exposure?
- Is Tax Fraud Likely to Be Disclosed During Divorce Proceedings?
- When Can a Divorce Result in Both a Husband and Wife Facing Exposure for the Potential Investigation and Conviction of Tax Crimes?
- What Should I Do About a Divorcing Spouse’s Threatened Criminal Tax Disclosure?
- Is a Full Disclosure of Assets Required During a Divorce Proceeding?
- What Is Asset Dissipation?
- How Can a Divorcing Spouse (and the IRS) Identify my Undisclosed Assets / Income?
- Can I Seek a Tax-Motivated Divorce or Annulment?
- When can Divorce Court Tax and Financial Records be Sealed or Redacted?