Does Tax Fraud Get Exposed During Divorce Proceedings?

Author: Miod & Company
Date: June 17, 2022
Category: Tax
Average Time Reading: 6 minutes

Divorces can take an emotional toll on many people. During such a turbulent time, a spouse may not want to evenly split every marital asset with their soon-to-be-ex. Alternatively, he or she can decide to expose any tax problems you’ve had in the past.

However, this often leads to a path of illegal activities. And it could even lead to allegations of tax fraud made by your ex-spouse. To ensure you won’t be charged with tax fraud/evasion on either side, let’s talk about why it happens during a divorce.

What is Tax Fraud / Tax Evasion?

First, tax evasion is the illegal avoidance of taxes. It involves underreporting income, inflating deductions, or hiding funds in overseas accounts. Individuals and huge corporations can evade taxes.

Don’t mistake it with tax evasion: the legal way to get tax deductions, such as the child tax credit.

Divorced spouses don’t always consider criminal accusations. A settlement usually involves months of wrangling and haggling over property or child support, not tax offenses.

Nonetheless, imagine a spouse hides funds in a foreign account to safeguard them from an ex. In such instances, it’s tax evasion, with heavy repercussions.

Why is it Exposed?

When a spouse accuses a former partner of tax evasion, it’s usually to get a bigger settlement. Their motivation to bring this up throughout the divorce can be varied.

Aside from emotions, spouses may be tempted to expose the other to tax evasion. The other spouse can do so in order to obtain access to hidden marital assets.

A spouse may also expose their partner to appear more trustworthy or favorable to a judge or the public. Threatening to reveal the knowledge in exchange for a larger share of the property.

To prove the accusations to be accurate, the court requires the existence of the unpaid taxes or concealed assets, affirmation of the defendant’s intentions to avoid taxes, and also their desire to avoid paying with the knowledge of their duty as a U.S. taxpayer.

What is the True Harm of Tax Fraud?

Tax fraud or evasion accusations can lead to the loss of marital assets. It can also lead to the obligation to return undervalued assets, further fines, or even incarceration.

According to the IRS, intentional tax evasion/fraud actions can result in fines up to $100,000 per individual, or $500,000 per corporation, and up to 5 years in prison.

You could face charges for tax evasion, false document submission, or conspiracy to commit tax fraud. The spouse who is considering disclosing this information to the IRS, on the other hand, should be cautious—the risks do not only apply to the accused.

These charges can pose ethical concerns for the family law and tax professionals who represent them, as well as impact the depletion or total loss of marital assets. For example, after the claims are made and brought to the IRS’s attention, they may decide to seize or forfeit marital assets. Furthermore, if the accused spouse is imprisoned, they may be unable to pay alimony or child support without a stable source of income.

The time when the illegal actions took place also plays a huge part in the puzzle. If it’s clear the accuser knew of the evasion when it happened, they can face similar criminal charges.

The Right Step

It doesn’t matter whether you or your spouse didn’t plan to avoid taxes or hide assets in foreign accounts. The court may rule against you.

You should consult an expert about your situation to avoid the possibility of paying hefty fines or serving time in jail.

Hiring an accountant or an advisor can guide you through your settlement, help you receive a fair division of your assets, and discuss your options if you think you have dabbled with tax evasion.

No one should go through a divorce alone, and that’s why all of us at Miod and Company want to help!

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