As we discussed in our previous family law blog post, the IRS has significant time and opportunity to audit the tax filings of divorced couples. Depending on what is suspected or found in your finances, the statute of limitations for audits could be extended indefinitely. So how do you protect yourself if you have been wrongly accused of tax fraud?
One commonly-used defense in post-divorce tax fraud cases is the “innocent spouse” rule. If your ex-spouse did not properly report income or pay taxes owed, you may ask the IRS to assign the fault to your spouse, and in doing so, to absolve you from liability.
There are three general forms of relief under this rule:
- Innocent spouse relief: This applies when your ex-spouse either reported income improperly, claimed inappropriate tax credits or deductions, or failed to report income entirely. If the IRS finds that this applies to you, you likely will not have to pay the additional tax obligations uncovered in the audit.
- Separation of liability relief: This applies to couples who are divorced or separated, and who have not reported an item properly on a joint tax return. If the IRS finds that this applies to you, the additional tax burden of that item will be divided among you and your ex-spouse, and you will each be required to pay a specific amount.
- Equitable relief: This applies when something is improperly reported on a joint return, and when that inaccuracy is found to be the fault of your spouse. Alternately, it applies with your return is accurate but the correct tax amount was not paid.
Being audited by the IRS can be a scary thing, especially as you are navigating life after a difficult divorce. As with property division and any other financial process, the best thing to do is to keep detailed records of your finances, as they can provide your innocence should the worst transpire.
Source: Forbes, “Divorce Causes Tax Audits,” Cameron Keng, Feb. 10, 2014