Michael Cohen’s Case Reminds Everyone of the Potential Spousal Liability When Signing a Joint Federal Income Tax Return With Your Spouse
As reported by the press, “Mr. Cohen this month began a prison sentence stemming from his guilty plea in a hush-money scheme to silence women who said they had affairs with Mr. Trump.” New York Times, May 17, 2019, “Trump’s Other Businesses Offset Drip at Mar-a-Lago,” page A18. However, one of the rarely noted main factors in Mr. Cohen’s decision to enter a guilty plea actually related to his unreported federal tax obligations. Most importantly, it is noted that Mr. Cohen filed joint federal tax returns with his wife exposing her to liability and potential prosecution.
Very few couples realize that by signing a “joint” federal income tax return with your spouse, you are both, jointly and individually, responsible for 100% of the taxes for the income reported, but also for all taxes on any unreported income. This applies even if you are later divorced and even though the divorce decree (binding only between the two of you) makes one spouse entirely responsible for this debt.
However, of equal or greater concern is that the blameless spouse also may be implicated for criminal prosecution arising from a joint tax return. Keep in mind that virtually all financial crimes are often the subject of related criminal tax crimes based purely on the criminal defendant’s tax returns, which are signed “under penalties of perjury”. Again, it has been reported that Michael Cohen decided to plead guilty, in part, because his wife signed his tax returns and therefore, his wife would be implicated in his crimes, according to a person familiar with the events. See The New York Times, January 14, 2019, page A-10.
There is a very limited defense to civil liability available to the naive spouse on a joint tax return, called the “innocent spouse rule.” See IRS Form 8857 Request for Innocent Spouse Relief. However, the innocent spouse defense is remarkably narrow and, therefore, difficult to successfully establish. First, you must request relief from the IRS within 2 years of the commencement of collection initiated by the IRS, and among other things, you must prove at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax. Next, you must also prove it would be unfair to hold you liable for the tax.
Michael Cohen is alleged to have failed to report more than $4 million of income. Depending on the circumstances, the IRS may claim it is difficult for his wife to prove she had no reason to know about a relatively large sum of income. Among other things, the standard applied is whether before signing the joint return a reasonably prudent person would have concluded further inquiry of your spouse’s activities was warranted or simply would have been expected in order to know there was underreporting of tax or income. Your signature on the return includes a declaration you “examined” the return and schedules which are “true, correct, and complete.”
If you have questions about joint tax returns or the “Innocent Spouse Rule”, please feel free to contact Herb Fineburg at .
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Mr. Fineburg is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or unrelated business partners and has handled the resolution of shareholder and partner disputes and buy-outs. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales. Mr. Fineburg, who began his law career as a commercial litigator and bankruptcy lawyer, frequently provides litigation counsel and assistance to a wide range of firm clients. His articles have appeared in the Pennsylvania CPA Journal, the Journal of S Corporation Taxation and other publications. A graduate of Washington University in St. Louis, Mr. Fineburg received his law degree from the University of Missouri and a Master of Laws in Taxation (LL.M) from the New York University School of Law, Graduate Division.
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