Consider the following scenario where a husband typically prepares the couple’s married filing jointly tax returns on Turbo Tax with very little involvement from his wife. The wife typically just signs where her husband says so. The husband decides that he wants to take steps to “further” reduce their joint tax burden. Since the husband is a W2 employee and has run out of ideas for additional unreimbursed employee expenses and Schedule A – Itemized deductions, husband invents a hypothetical “paper only” business where no real business assets exist. The company exists merely as a method where he can write off more of his “personal expenses” as business expenses.
In anticipation of paying less in taxes in late December of year 1, the husband takes his friends golfing for the week and purchased a new 911 Porsche (curb weight 3,153 lbs.). The husband titles the Porsche under his “consulting business” and in preparing year 1 taxes in year 2, he:
In year 4, when the husband and wife are audited over a very suspicious Schedule C loss that seems to magically offset H and W’s ample W2 income, the IRS auditor quickly realizes that there is no “consulting” business and that the deductions were personal in nature. IRS auditor stops the audit and refers the issue to the Criminal Investigation Division.
One might wonder whether the wife with her apparent minimal involvement would be implicated in this tax crime. Depending on the exact circumstances, the short answer is that she is likely jointly liable for the crimes with her husband. This is due to the fact that she certified the tax return under the penalty of perjury. Should the wife decide to divorce the husband and disclose this information, the divorce itself will not protect her from potential criminal liability since the act occurred during the marriage. Faced with circumstances like these, a prudent spouse would immediately seek the counsel of a criminal tax attorney.
Also consider the case of U.S. v. Hoover, 83 Aftr 2d. 99-2214 (175 F.3d 564) where Hoover and his wife began highly contested divorce proceedings in 1989. As a result of the divorce, the wife was granted certain assets of the couple’s farm. In the process of the wife securing these assets, Hoover’s tax and dairy records were subpoenaed resulting in a federal criminal tax investigation being opened.
Mr. Hoover was convicted for filing false returns and statements. This conviction was affirmed and at appeal, the taxpayer was found to have acted willfully, in part, due to admissions made during the divorce proceedings including the fact that Hoover had:
Hoover also was found to have hidden money from the IRS and W by putting property and bank accounts in the names of other people, instructing creditors to write checks made out to his sons despite retaining the funds. He admitted during a deposition in his divorce that his tax returns were not truthful and that he had earned substantial unreported income from his dairy business.
However, Hoover’s argument at appeals was that his true motivation was to hide his income and assets from his ex-wife and not to commit willful evasion. However, this was determined to be not persuasive given the tax savings windfalls to himself he had enjoyed at the expense of the government.
Thus, family law attorneys need to very carefully evaluate the ramifications of “on-the-record” incriminating financial disclosures made during a marital dissolution. Family law attorneys should use an abundance of caution and seek a consultation from qualified criminal tax defense counsel before concluding that “innocent spouse” protections will truly protect their client. The failure to do so can result in the client facing the criminal and civil consequence of past-unreported income on married filing joint returns or any other tax filing where fraud occurred and their client signed or was merely involved with in that matter.