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FOR THE LOVE OF MONEY: Innocent
*Music stars who find themselves in trouble with the law are not necessarily breaking news. There was P. Diddy and his various legal trials and you can't forget Jay-Z's legal issues, which he talked about in several songs (like "Guilty Until Proven Innocent" (2000) and "Izzo (H..O.V.A.)" (2001)…you know H to the izz-O…V to the izz-A, not guilty...). The most recent "victim" of the system is the Grammy-winning producer, Dallas Austin.
According to an EUR article on July 5, 2006, Mr. Austin has pleaded guilty to cocaine possession in the United Arab Emirates. Apparently, he was traveling to a star-studded birthday party being held in Dubai for supermodel Naomi Campbell; but, he never made it to the party. He was stopped at the Dubai airport on suspicion, (and correctly so), of drug possession. The drug of choice was cocaine. What's his defense? Well, "You've Heard It All Before" (Sunshine Anderson, 2001) – he is "Innocent" (Alexander O'Neal, featuring Cherrelle, 1985), because he didn't know what he was doing was illegal. Well, after being sentenced this week to 4 years in prison, as luck would have it (and having friends in high places), he was pardoned and deported back to the US.
We will continue to watch how this plays out for Mr. Austin. Perhaps this will serve as a wake up call to others….perhaps not.
The point is, ignorance of the law is no defense and the same is true in the tax world. Whether you know the law or not, you are still responsible for paying your taxes. But just like Mr. Austin, it pays to have friends in high places and in the tax world, you've got me.
If you file a joint tax return with your spouse and you have no knowledge or no reason to know that your spouse is cheating on his taxes, you may qualify for some tax relief under the Innocent Spouse rules. Under these rules, you will need to show that when you signed this joint tax return, you didn't know, and had no reason to know,
that your spouse was less than truthful on the tax return. The IRS may "forgive" you for being naïve and only go after the spouse who made the false tax filings. For example: If you know that your spouse has a side consulting job where he makes a few thousand a year and you don't see this money reported on your tax return, you can't claim years later that you were innocent. You may not have agreed with what
your spouse was doing, or even thought it was that big of a deal since he didn't make that much money from it; but if you signed the joint tax return, it doesn't matter what your personal morals are on the issue.
Innocent Spouse claims are made by filing Form 8857, Request for Innocent Spouse Relief. If the IRS accepts your claim, you will not be responsible for the tax obligations, even though you signed a joint tax return. In addition to the Innocent Spouse claim, a scorned spouse may also seek tax relief under three other rules: Separate Tax Liability, Injured Spouse, and Equitable Relief (Note: use the same Form 8857 to claim relief under any of these rules).
Under the Separate Tax liability rules, the IRS treats you and your spouse as if you filed separate tax returns (using the "married filing separate" filing status); even though you actually filed a joint tax return. They recalculate your taxes as two separate people and divide up all of the deductions, credits, etc. This results in two tax returns and, of course, you will only be responsible for paying the taxes on your own tax return (and, in many cases, it will result in a refund to you). Folks tend to use this rule to help in situations where they know about the false statements on the tax return, and they
won't be able to get Innocent Spouse Relief. With the Separate Tax Liability rules you can have knowledge of the discrepancies on the joint tax return, but you can only use the rule if you're legally separated, divorced, or live apart from your spouse for at least one year.
With the Injured Spouse rule, you are asking the IRS to give you your tax refund instead of using it to pay off your spouse's past due student loans, child support, alimony or prior federal and state tax debts. Here's how this rule typically helps:
A couple files a joint tax return and expects a refund. One spouse has back taxes, or child support payments that he accumulated prior to the current marriage. The other spouse keeps wondering what is taking the IRS so long to pay the current tax refund. It turns out that they kept her refund check to pay down her spouse's back taxes and child support (debt he acquired before they got married). She's upset because she
had nothing to do with those payments in the first place. Back when he was accumulating debt, she was busy singing "Me Myself an I" (Beyonce, 2003) because she was one of the "Independent Women (Part I)" (Destiny's Child, 2000) with her own life and making her own decisions; she was in "Control" (Janet Jackson, 1986). So why should her share of a joint tax return refund today go to pay off his back
taxes and child support from the past? If she can prove all of this, she may get her share of the refund check back under the Injured Spouse rule.
Finally, what if you owe the money, but you just didn't pay it? Under Equitable Relief, the IRS can also forgive your debt; if they determine that it would be "unfair' to collect taxes from you, the innocent spouse. Don't get your hopes up too high thinking this rule will help you, because very few people have stories compelling enough for the IRS to just forgive you because of your naivety.
Also, keep in mind, if you still have a bank account with your spouse, and he or she has old tax debts prior to your marriage, the IRS may come after that joint money to satisfy these debts. Although they are not technically coming after you for the taxes, it will certainly feel that way if they take the money out of your joint account. One way to protect yourself in this situation is to put your money into a new bank account that you own by yourself. Because of complicated stories like this one, if you're going through a separation or a divorce, please make sure to notify your tax advisor early so that you can protect your funds.
For more on making the innocent spouse claim, check out IRS Publication 971, Innocent Spouse Relief.
Shannon King Nash is the author of the award-winning book entitled, "For the Love of Money: The 411 to Taking Control of Your Taxes and Building Your Net Worth." She uses song lyrics and entertaining stories ripped from the headlines to teach readers how to manage their finances and taxes. Shannon is a CPA, Tax Attorney, and regular expert commentator on KJLH FM Radio in Los Angeles, and has appeared on national television. Interested in finding out more about making an Innocent Spouse Claim? Contact the Nash Management Group at 818-986-2665 or visit www.nashgroup-usa.com.
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