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What Should I Do About a Divorcing Spouse’s Threatened Criminal Tax Disclosure?

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    If you are involved in a divorce and have been threatened by your soon-to-be former spouse regarding the disclosure of alleged tax crimes, you are facing a very serious divorce tax issue. Even if your spouse has not made an explicit threat regarding the disclosure of potential tax fraud or tax evasion, you may have concerns regarding your past behaviors. The time to address these concerns is at the outset of the process. Depending on your tax attorney’s assessment of the situation and whether he or she believes that the allegations against you are likely to have merit.

    Thus, the first step to meeting the challenge of a potential criminal tax disclosure is to meet with an experienced tax attorney. It should never be the same attorney your divorcing spouse is using.  It is important to meet with a tax lawyer because only the attorney-client privilege is sufficient to protect any disclosure you make. Should you make disclosures to an accountant, it is highly likely that the accountant-client privilege will be insufficient to protect the accountant from subpoena. However, an accountant may collaborate under the supervision of a tax lawyer through a legal device known as a Kovel letter.

    What to do in a Divorce When the Alleged Tax Charges Appear to Have Merit

    Unfortunately, in some circumstances that charges that are threatened to be disclosed may appear to have at least some merit. In situations where it appears that the threatened disclosure does have merit, the divorce should not proceed until the criminal tax issues are mitigated or otherwise handled. Situations where it may be prudent to address the criminal tax allegations before the divorce include:

    • Scenarios where the accused spouse is likely to be deposed and may be tempted to cover-up or otherwise conceal past tax fraud through perjury.
    • Instances where mandatory public disclosure will result in the loss of certain 5th Amendment protections
    • Instances where the accused spouse’s credibility is likely to be damaged in the eyes of the divorce court.
    • Scenarios where corrective actions may be viewed as non-voluntary and foreclose the possibility for relief through voluntary disclosure.
    • Proceedings where evidence of past tax crimes would be permanently preserved as part of the public record.

    In the scenario where the threatened tax fraud disclosure appears to have merit, your attorney is likely to engage in a few initial steps. He or she is unlikely to hire a forensic accountant until the criminal matter is resolved because of the potential for discoverability and waiver of certain 5th Amendment protections. However, he or she may utilize Kovel Accountants to assess risk of tax crimes having been committed and to mitigate the client’s exposure.

    Depending on the facts and circumstances revealed by the assessment, the lawyer may recommend that you make either a loud or a quiet voluntary disclosure. A loud disclosure involves making a full and complete disclosure of past tax fraud. If the terms of the program are met, then taxpayer will not be recommended for criminal prosecution. All disclosures must be timely, voluntary, complete, accurate, and legally sufficient. A quiet disclosure is a less intensive process, but it does carry more risk. This decision should not be made without the guidance of an experienced and strategic tax lawyer. In other circumstances, the attorney may even recommend the use of a private judge for the divorce proceedings. Using a private judge may be advisable when the parties wish to avoid the creation of a public record containing incriminating evidence or testimony.

    What to do in a Divorce When the Alleged Tax Charges Do Not Appear to Have Merit

    If the tax attorney assesses the situation and reaches the conclusion that the disclosure of alleged tax fraud is unlikely to have merit, he or she is likely to recommend different approach to the matter. First, the attorney is likely to recommend for the divorce proceedings to continue.

    Additionally, the tax attorney is likely to perform additional due diligence with a forensic accountant. The forensic accountant may be retained to further asses where merit exists. The forensic accountant will be instructed to avoid disclosing the existence of any tax improprieties to anyone, including the client.

    The above captures some of the regular and more typical steps a tax attorney is likely to take when facing a potentially sensitive divorce-tax situation. However, every situation is unique and individuals should never proceed in a potential criminal tax matter without legal representation.

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