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After his wife embezzled funds, the IRS sent him a bill

On jointly filed tax returns, each spouse can be 100 percent responsible for back taxes caused by errors or omissions. The tax issues started when the wife was accused of embezzling almost $500,000 from her employer in 2010 and 2011. After a conviction for theft, she was sentenced to prison.

The husband got a surprise when the IRS sought more $100,000 in back taxes from him. He sought innocent spouse protection arguing that he had no idea what his wife was doing. In this post, we detail why he was partially successful at the tax court.

Six factors in his favor

The court uses a multi-factor test in analyzing these claims. Some of the factors include:

  • Financial sophistication
  • Lavish expenditures
  • Testimony of a spouse
  • Marital status
  • Health
  • Past tax compliance

In this case, the husband had an associate’s degree and worked in a local factory - he wasn't financially savvy. His wife handled the couple’s financial affairs. She didn’t pay off their mortgage or buy a luxury car. Even with the theft, the couple struggled and had their utilities disconnected for nonpayment. There wasn’t anything that would have tipped off the husband of a big financial windfall.

While the wife testified that her husband knew what was happening, the judge gave her testimony little weight. The husband had divorced his wife by the time he appeared in tax court. He was also a disabled veteran and had proof he had paid his taxes.

Credibility of testimony often makes the difference

The judge found his testimony credible in holding he did not owe the estimated $150,000 (interest and penalties had added to the balance owed) related to the 2010 embezzlement. He was still liable for 2011 (approximately $18,000) because he knew about it by then.

When you trust a spouse to handle the finances, issues may not surface until a criminal charge or divorce. When a tax obligation comes as an unpleasant surprise, find out what remedies exist.

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