Divorce, Taxes, and the Family Business

     An issue frequently overlooked is how tax liability can be used as a divorce tool.  If improperly used, tax liability can destroy all of the marital assets.  In the worst case, tax liability can seriously impact the future financial security of either spouse.

Divorce and Family Business

    The most common situation where taxes become an issue is in a divorce with a family business or professional practice.  The owner - spouse may have hidden cash receipts or recorded inflated expenses in an effort to minimize the profits of the business.  The other spouse is often aware of and approves of this practice.  During the marriage, minimization of income results in higher household income and a better lifestyle for the couple. 

Tax Liability and Blackmail

    This practice is illegal or borders on illegal.  But during a divorce each spouse usually tries to use past tax behavior to gain an advantage.  The owner - spouse wants to minimize past income in an effort to lower child support, alimony, or division of marital property.  Of course the other spouse wants to prove the opposite.

    The result is a game of chicken - with one spouse threatening to turn the other spouse in to the IRS.  This is a dangerous game for all involved.  Do it yourselfers will find the situation blowing up in their face.  People with attorneys may find the attorney reluctant to deal with the situation.

The Potential Problems in a Divorce Court:

• Your Attorney cannot assist the owner - spouse commit the crime of tax evasion.
• The non-owner spouse may end up liable for half of the back taxes, penalties, and fines.
• The Judge may decide to turn everyone in.
• In an extreme situation, everyone can go to jail.

The Potential Solution in Tax Court:

• The IRS has a provision called Innocent Spouse Relief.  This provision gives complete or partial tax forgiveness to an innocent spouse.  But be aware - the definition of "innocent" is technical, elusive, and difficult to understand. 

The Bottom Line:

    Expert advice is essential where there is a potential tax issue.  Your attorney should discuss this problem with you, give you alternatives, and discuss potential risks.  Don't throw out allegations of tax issues until you know the potential risks and rewards. 

 

If you are looking for divorce information you will find tons of free information on this website. Divorce Attorney Howard Iken personally created this website with a personal mission:  to help people at this critical moment in their lives and to make the process of divorce easier, more understandable, & less intimidating. CONTACT US NOW or call 888-469-3486