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Will you be held responsible for your ex’s tax fraud?

| May 3, 2021 | Tax Law |

You and your spouse may have owned a successful business together, leaving you very well off. However, as is the case with many family-owned businesses in the Washington D.C. metro area, one spouse would be responsible for some tasks such as paying self-employment taxes without the other spouse knowing many if not all of the details of these tax returns. This can be especially problematic if a spouse hides tax returns from the other spouse or lies about them, and they are later penalized by the Internal Revenue Service. If you have divorced your spouse, are you still responsible for paying all these back taxes?

Innocent spouse relief

In general, improperly reported or omitted items on a tax return are the joint responsibility of both spouses, even if they divorce. However, when it comes to individual income or self-employment taxes, you may be eligible for innocent spouse relief. There are several conditions that must be met in order to qualify for innocent relief.

First, the tax return at issue must have been filed jointly. Second, you must establish that when you signed the return, you did not know or have reason to know there was an understatement of tax. Third, it must be found that it would not be fair to hold you responsible for the understatement of tax. Finally, you and your ex must not have fraudulently transferred funds.

Knowledge in innocent spouse relief cases

When it comes to innocent spouse relief, a spouse would have known or had reason to know of the understatement if they had actual knowledge of the understatement or if a reasonable individual in similar circumstances would have had knowledge of the understatement. If a spouse had actual knowledge or reason to know, innocent spouse relief may not apply, meaning both spouses are jointly responsible for the understatement.

The IRS will consider all facts and circumstances when determining whether a spouse had reason to know of an understatement. This includes: the nature of the error and the amount of money involved in the error; each spouse’s financial situation, education and business experience may also be considered; each spouse’s participation in the understatement; whether the spouse applying for innocent spouse relief asked about the items on the return, and; whether the understatement departed from the reoccurring patterns in previous tax returns.

Learn more about innocent spouse relief

Learning that your ex-spouse filed fraudulent tax returns can come as a significantly unwelcomed surprise. This post is for educational purposes only and does not contain legal advice. Our firm’s webpage on innocent spouse relief may be of interest to those who want to learn more about this topic.